SDR consultation: Using ‘transitioning’ in fund labelling is misleading

Update: FE fundinfo’s regulations manager Mikkel Bates, the AIC and UKSIF respond to FCA sustainable disclosure requirements

FE fundinfo’s regulations manager Mikkel Bates has warned the UK regulator it faces further confusing consumers with the current fund label proposals.

The Financial Conduct Authority (FCA) closed its consultation on its Sustainability Disclosure Requirements (SDR) paper last week in which it asked the investment industry for input on the design of:

  • sustainable investment labels 
  • consumer-facing disclosures for investment products 
  • client- and consumer-facing entity- and product-level disclosures by asset managers and FCA-regulated asset owners

Bates (pictured left), who is also a member of the ESG Clarity Committee, urged the regulator to consider the Investment Association (IA)’s Responsible Investment Framework as using words such as ‘transitioning’ and ‘aligned’ funds – that are not clear – will mean providing further education programmes to clients.

“The SDR seeks to build on the important work that organisations such as IA and The Investing and Saving Alliance (TISA) have undertaken to clarify the terminology surrounding ESG investing, but without further guidance for consumers, there is a risk that some funds could be shunned in error by investors who are seeking to avoid, in principle, those practices or sectors on which the managers seek to exert influence to change, through robust engagement policies.

“Transitioning funds are definitely the stand-out in terms of both labelling and the description of their activities. It is important that consumers are aware that a low allocation to taxonomy-aligned activities is not necessarily an indication of unsustainable investment, especially as many holdings in a transitioning fund would naturally be shunned by many sustainable investors. They need to be made aware of the intention to drive the transition (including the process, how success is measured and the triggers – both positive and negative – for disinvestment).”

Bates suggested the FCA would need to create a consumer-facing ‘factsheet’ produced for advisers and fund groups to share with clients to ensure they are able to understand the terminology being used.

However, the regulations manager also highlighted there is already a number of pre-sale documents that advisers and consumers need to to analyse, and these should perhaps be consolidated.

“We would prefer the disclosures to form the basis of a new type of disclosure document for all funds, to include much of the information on the current KIID/KID. It is also important for consumers to be able to compare the key disclosures from different funds.”

See also: – FCA urged to move fast on ESG fund labelling

AIC response

The Association of Investment Companies (AIC) also urged the FCA to consider providing clear distinctions for product labels that focus on either environmental sustainability and those targeting positive change, while also calling for the regulator to set “demanding standards” for any fund wishing to call themselves “sustainable” or make ESG claims.

In addition, the AIC recommends that the same standards are applied to all retail investment products that fall under the PRIIPs and UCITS regimes, including investment companies.

See also: – AIC publishes members’ ESG disclosures

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “We believe the bar for investment products to call themselves sustainable should be set high enough to clearly differentiate them from other products. Product labels should be clear, and disclosures should be short and jargon-free. It’s also important that investors know whether those products are focusing on environmental sustainability, social issues, or both. 

“Finally, rather than the new disclosure regime applying to some products but not others, all retail investment products should be within the scope of the regime including investment companies. Investment companies are well placed to invest in less liquid assets that can have a large environmental or social impact: for example, our Renewable Energy Infrastructure sector raised a record £3.4bn last year. They should be held to the same standards as other investment products so that investors choosing an investment for its sustainability credentials can compare like with like and have confidence that the label is meaningful.”

UKSIF response

Meanwhile, the UK Sustainable Investment and Finance Association (UKSIF) has said the UK should not start assigning sustainable fund labels until its green taxonomy has been put into operation, and should potentially drop the label ‘responsible’ altogether,

In its response, UKSIF said although product labels, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), are a good idea for the UK’s SDR, they should not be set out until the UK has firmed up its green taxonomy, which for example is still awaiting implementation of the Technical Screening Criteria (TSC) for the taxonomy’s climate change mitigation and adaptation objectives.

See also: – What we know about SDR so far

Similarly, issues such as which taxonomy funds will need to report against need to be ironed out before a labelling system for the SDR is confirmed, as well as thought given to how SDR reporting will line up with reporting against things such as the TCFD and TNFD, and how the SDR matches up with international standards such as the ISSB.

UKSIF is also wary of the UK’s SDR replicating SFDR too closely in case it falls into the same issues the EU legislation has had. For example, it said “the [UK’s] ‘Not promoted as sustainable label’ has been mapped against SFDR’s ‘Article 6,’ which we think is arguably not accurate given ESG integration forms part of the criteria for ‘Article 6,’ but not for the minimum criteria for the ‘Not promoted as sustainable label’ which states, according to the Discussion Paper, that sustainability risks have not been integrated into investments as well as no specific sustainability goals being set”.

Also when it comes to labelling, UKSIF would like to see the UK system take social and governance issues more into account. Careful thought will also need to be given to what constitutes an ‘impact’ product, and how transitioning investments should be labelled and what timeframe they have to transition.

Due to a decline in its usage in favour of terms such as ‘ESG’ and ‘ethical’, UKSIF said: “Further clarification is needed for the ‘Responsible’ category and the FCA may wish to reconsider this category entirely.”

It added: “The term ‘Responsible’ could inappropriately raise expectations and over-promise what it could deliver for clients and savers, with this term implying higher sustainability attributes than what it possesses in reality (namely ESG integration), according to the regulator’s classification criteria set out. While ESG integration is generally seen as synonymous with responsible investment within the industry, the wider public could understand responsible investment as incorporating a greater focus on sustainable investing and this gap in understanding will need to be addressed. This could lead to risks of ‘greenwashing’ in this labelling category, with savers seemingly unaware that this is very light-touch in considering sustainability issues.”

Other proposals

The consultation also requested views on having an ‘entry level’ criteria for funds wanting to be labelled as sustainable. UKSIF suggested this criteria could be having signed the UN PRI or the UK’s Stewardship Code, or being a member of the Net Zero Asset Managers Initiative or a similar initiative.

The FCA also proposed having two layers of disclosures – one simpler for consumers and one more detailed – in order to avoid confusion. This appears practical, although UKSIF pointed out both options should be available to consumers if they wish to see more detail.


Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...