For the responsible investment industry, the year so far has largely focused on the negative rhetoric around ESG and underperformance in sustainable portfolios. Could it be that an unlikely candidate, the Financial Conduct Authority (FCA), has delivered the one great positive of 2022 for the UK ESG industry?
The year is far from over – and we still have optimism around what COP27 can deliver – but the proposals around Sustainability Disclosure Requirements (SDR) have been welcomed by the vast majority of investment managers ESG Clarity has spoken with since it was published on Tuesday 25 October.
ESG investment professionals had hoped for regulation and policy that will catch up with the fast-paced changes we have seen in this space and tackle conundrums around disclosure, labelling and transparency – it tackles all this with an anti-greenwashing cherry on top.
Of course, as with any new piece of regulation, it is not without criticism, and one of the major bug bears has been the delays getting to this point; let’s face it, the FCA has never been known for its timekeeping (for my part, you know you are passionate about your topic, or perhaps I am just an ESG nerd now, when you are gutted the big announcement happened when you are on annual leave).
But this time, the delays have been for good reason; when the FCA announced in July (it had been due to publish a consultation update in Q2) it was delaying it said this was to “allow us to take account of other international policy initiatives”. While it was not mentioned in the regulator’s statement at the time, the industry pointed to the development of the International Sustainability Standards Board (ISSB), which had been charged with creating a global baseline of sustainable disclosures by early 2023.
This does seem like a pretty important consideration, and it was only last week the ISSB announced its own developments and scope for disclosures.
Another criticism around SDR is on fund labelling; investment professionals noted the “long lead time” companies have to adhere to the measures amid concerns there will be limited effect in directing capital flows away from the biggest emitters when urgent action is needed. But the three labels recognising different fund approaches has been overwhelmingly welcomed.
On disclosure, commentators have highlighted the already significant number of disclosure frameworks, mandatory or voluntary, around sustainability that firms have to consider.
But as already flagged, the FCA has taken time to consider the ISSB and the consultation documents said: “We have sought, as far as possible, to achieve international coherence with other regimes – notably the Sustainable Finance Disclosure Regulation (SFDR) in the EU and proposals by the Securities and Exchange Commission (SEC) in US.”
Ticking so many boxes in terms of what the industry hoped for, is this an early Christmas gift to the industry from the regulator? Is this the “watershed” moment in regulation that commentators predicted in ESG Clarity in January 2022’s outlook pieces?
I may be over egging it, but credit where credit is due.
The regulator acknowledged this work was very much needed in 2021 and hired the very well-respected Sacha Sadan, who had the experience of working in the thick of engagement and stewardship at one of Europe’s largest asset managers LGIM, as its director of ESG to lead the consultation.
It has carried out consumer testing, consulted members from across the industry, and drew on the advice of some of the top ESG investment experts (that we are fortunate enough to have on our ESG Clarity Committee).
The FCA has listened, and now it has delivered.
Julia Dreblow, founding director of SRI Services and Fund EcoMarket, and ESG Clarity Committee member, recently said in our first ESG Clarity Live the industry should really be more sympathetic to the regulator.
“The FCA doesn’t always get a great press, but in this, honestly, it has been really, really good and everyone has been saying ‘hats off’. It’s doing the right things, bringing all together, it’s learning, and I’ve not heard anyone say bad word against it.”
Now it’s the investment industry’s turn to step up.
Send in your feedback (consultation closes 25 January), highlight what you are welcoming in and where you have concerns.
But not only that, have a long hard look at your portfolios and business strategy and ask yourself is it truly aligned with net zero and a just transition? Are you doing what you say you are doing? Or will you be a victim of the anti-greenwashing marketing crackdown the FCA, and other regulators are intent on pursuing?
With the FCA announcement, talk about there never being a better time to invest in ESG from a performance perspective, and consumers further increasing demand for ESG solutions, I feel like we are on the cusp of another major turning point for the sustainable investment industry, where all stakeholders switch up another gear. And the ESG nerd in me is so excited!
For more on the next steps for the asset management industry, see our upcoming panel discussion ESG 2.0: Changing gear that will take place in November.