Richard Cooper, business development manager at The London Institute of Banking & Finance, looks at what paraplanners need to know about the impending regulation for sustainable investment products.
Consumer demand for sustainable investment products is growing rapidly. The Financial Conduct Authority’s (FCA’s) latest Financial Lives Survey shows that 81% of adults surveyed would like their investments to do some good as well as provide a financial return.
Firms are responding to this demand. According to Investment Association (IA) data, the UK market for UK-domiciled responsible investment funds grew 64% over 2021 to reach £79 billion. This far outstripping the 11% growth in UK domiciled funds overall.
However, consumers must be able to trust sustainable investment products to contribute to positive environmental or social outcomes.
You’ve probably heard the term, ‘greenwashing’, which is commonly used to describe exaggerated, misleading or unsubstantiated sustainability related claims about a firm’s products – claims that don’t stand up to closer scrutiny.
What’s the regulator doing about greenwashing?
Amid growing concerns about greenwashing, in October the FCA issued a consultation paper on their proposed Sustainability Disclosure Requirements (SDR) and Investment Labelling (CP22/20). It’s a comprehensive set of proposals covering several different areas that will have an impact on financial services. And it will affect the work you do as a paraplanner.
The FCA intends to follow with further consultations in due course. These consultations will cover:
- proposals to expand the scope of the SDR regime to overseas and pension products, and
- new rules for financial advisers on taking sustainability preferences into account.
The new rules aim to help retail investors navigate an increasingly complex investment product landscape, protect them from greenwashing and build trust.
The FCA’s concerned that greenwashing has already eroded trust in the market for sustainable investment products. It believes that if consumers can’t trust the claims firms make about their products, they will shy away from this market. That, in turn, will slow the flow of much-needed capital to investments that can drive positive change.
What do the proposals cover?
The initial proposals cover these main areas:
- sustainable investment labels to help consumers navigate the investment product landscape and enhance consumer trust
- consumer‑facing disclosures to help consumers understand the key sustainability‑related features of a product
- detailed disclosures targeted at a wider audience, for example, institutional investors and consumers seeking more information
- naming and marketing rules to restrict the use of certain sustainability‑related terms in product names and marketing materials, unless the product uses a sustainable investment label
- requirements for distributors – including financial advisers and platforms – who’ll be expected to provide information on labels and make available the consumer-facing product-level disclosures, and
- a general ‘anti‑greenwashing’ rule applied to all regulated firms which reiterates existing rules to clarify that sustainability‑related claims must be clear, fair, and not misleading.
As a paraplanner, you should be especially aware of the key points on investment labels and consumer-facing disclosure.
Investment labels
The FCA are proposing three investment labels and the consultation paper sets out the criteria you need to use them. The labels are:
- sustainable focus
- sustainable improvers, and
- sustainable impact.
Sustainable focus
These products will invest in assets that a reasonable investor would regard as being environmentally or socially sustainable. At least 70% of a ‘sustainable focus’ product’s assets must meet a credible standard of environmental or social sustainability or align with a specified environmental or social sustainability theme.
Sustainable improvers
These products will invest in assets that – while not objectively environmentally or socially sustainable at present – have the potential to deliver measurable improvements in their environmental or social sustainability over time.
Sustainable impact
These products aim to achieve a positive, measurable contribution to real-world sustainability outcomes.
If investments don’t match the criteria or have the appropriate key performance indicators (KPIs) and stewardship, they can’t carry one of these labels.
Consumer-facing disclosure
The FCA don’t want to introduce substantial new disclosure requirements and are aiming to build on existing disclosure rules. However, it proposes that all in-scope firms must produce a consumer-facing disclosure for all in-scope products as a new standalone document.
This means that even products that aren’t engaged in any sustainability strategies will require disclosures, though inherently more limited. For example, the label field must be marked with ‘no sustainable label’ and other fields marked ‘not applicable’.
The disclosures will have to be clear, concise, and suitable for consumers, and not exceed two pages of A4. They should also be presented alongside other key investor documents to ensure that consumers don’t consider sustainability-related information in isolation.
Next steps
After the consultation period closes in January 2023, the FCA will review the feedback it’s received and set out final rules by the end of the first half of 2023.
The FCA is proposing that the general ‘anti-greenwashing’ rule will apply as soon as the final rules are published. It expects the rest of the new rules to come into force 12 months after it publishes its policy statement.
You may wish to comment on the consultation paper. You’ll find it on the publications section of the FCA website. In any case, it’s well worth taking the time to read the full proposals – whether you wish to contribute to the consultation or not – and keep an eye out for the final rules and further consultation documents. Doing so will help you prepare for what’s ahead.
