The FCA has outline the UK's proposed ESG disclosure and product labelling framework and are of particular relevance to UK asset managers and their investment products.
The FCA, on 3 November 2021, published its discussion paper (the “DP”) on Sustainability Disclosure Requirements (the “SDR”) and investment labels. The DP was published alongside FCA’s ESG strategy (the “ESG Strategy”). The DP is intended to further the FCA’s aim to develop (i) transparency through high-quality sustainability disclosures; and (ii) trust in investment products and protecting consumers from misleading claims about their sustainability characteristics. The FCA’s work in this area also furthers the Government’s ambitions on climate change and green finance set out in the Government’s ‘Greening Finance: A Roadmap to Sustainable Investing Roadmap’, published in October 2021.
The DP notes that consumers are increasingly demanding ‘sustainable’ financial products and that the provision as well as the diversity of such products have seen rapid growth over the last couple of years. The FCA notes that in the absence of common standards, clear terminology and accessible product classification and labelling, there is a risk that consumers become confused by the array of ‘sustainable’ choices in the market and are unable to assess product suitability. This, the FCA says, could lead to a lack of trust in the market for sustainable investment products. The FCA has previously, in its ‘Dear Chair’ letter to authorised fund manager chairs, highlighted the risk of misleading ESG-related claims by products and providers. Through the DP, the FCA aims to start the discussion around developing systems that enhance transparency and trust as ESG and sustainable products continue to grow in prominence.
In order to simultaneously meet the information needs of both retail as well as institutional investors, the FCA is considering a 3-tiered disclosure system comprising (i) product labels (ii) consumer-facing disclosures (aimed at retail investors) and (iii) detailed disclosures (aimed at institutional investors and other stakeholders). Each of these tiers is considered below. The scope of the labelling regime is unclear and the FCA does not indicate whether these will apply to all products being marketed into the UK or only to those being marketed by UK authorised firms. The scope of the disclosure obligations is also not entirely clear, although the DP indicates that these will apply to UK-authorised asset managers and FCA-regulated asset owners (as is the case with FCA’s TCFD aligned disclosures). Separately, the FCA states that it is exploring how best to introduce specific sustainability-related requirements for financial advisers, so as to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. The FCA will develop proposals on these requirements for financial advisers in due course.
The input the FCA receives from the DP will inform policy proposals to be issued for consultation in Q2 2022. Comments on the DP should be shared with the FCA by 7 January 2022 using the form available on the FCA website.
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