The Financial Conduct Authority’s proposed sustainable investment labels will not be ideal for workplace pensions, says Aegon.
The FCA previously launched a consultation on its proposals to introduce a package of measures to clampdown on ‘greenwashing’ amid concern that firms are making exaggerated or misleading sustainability-related claims about their investment products.
The measures include introducing labels to help consumers navigate the market for sustainable investment products and ensuring that sustainability-related terms in the naming and marketing of products are proportionate to the sustainability profile of the product.
However, Aegon has warned that the pensions landscape, and in particular workplace pensions, have many different aspects which need to be considered.
Steven Cameron, pensions director at Aegon, said: “We support the FCA’s aims of improving sustainability disclosures and investment labels to improve decision making and halt ‘greenwashing’.
“While the initial focus is on investment products, we support the FCA giving early consideration to extending to pensions. However, the pensions landscape and in particular workplace pensions have many different aspects, including how members engage with investments, which need to be considered.”
Cameron said for individuals making active decisions around where to invest their pension, for example in a SIPP, applying the new labels may help them invest in line with their sustainability preferences.
However, the vast majority of workplace pension scheme members are invested in the default fund without giving any consideration to investments.
Cameron said: “Default funds are designed to meet broad needs of members and based on the current proposals, are highly unlikely to qualify for a sustainability label. Rather than investing solely in equities, they are typically multi-asset and often constructed on a fund of funds basis.
“They also often utilise de-risking strategies as retirement approaches, meaning a gradual change in asset mix. But the SDR proposals lend themselves most readily to equity-based investments. Furthermore, it will be very challenging for a broadly diversified fund of funds approach to qualify for any one of the three SDR categories.”
As a result, Cameron believes the proposals for investment funds “don’t look ideal for workplace pensions”, but said it remains important for pension schemes to highlight where they are seeking to contribute to the sustainability agenda.
He added: “Even if a default fund doesn’t meet the criteria for using a label, governing bodies and trustees should still be encouraged to take the lead in explaining to members their approach to sustainability.”
Cadi Thomas, head of ESG research at pensions and wealth specialist Isio, said that in order for labels to be successfully integrated in general, the watchdog must provide greater clarity around the thresholds for each product label.
Thomas said: “For a product to classify as “Impact”, there is an additionality clause which requires the product to direct new money to the cause, which may be problematic for many of the impact products that are currently popular in the market. The consultation also touches on disclosure requirements; we note the industry-wide need for consistent and verified ESG data.”
According to Thomas, the new rules are likely to have a “large impact” on the sustainable investment landscape in the UK.
Thomas continued: “Despite the fact that these rules are proposed as voluntary, we see these as becoming de facto for all investment managers in future in order to keep pace with the dynamic environment.
“There are therefore assumptions that may be drawn from the labelling requirements, such as that those firms and products that are not labelled are not sustainable. We think this is preferable and hope that this will push forward the level of ambition, understanding and awareness of sustainable products throughout the market.”
