What will the impact be for the asset management sector?
The FCA proposed in their ESG Strategy1 and Business Plan2 that sustainability-related claims alleging a misrepresentation or exaggeration of a firms’ investment products may lead to a breakdown in trust in the market for sustainable investment products, and may cause harm to consumers.
In October 2022, the FCA published their Consultation Paper (CP22/20)3 with the aim to introduce rules and transparent labels to assist consumers when making decisions to invest in certain sustainable products – namely the Sustainability Disclosure Requirements (SDR).
Initially, the FCA proposed five labels, however, upon feedback received as a result of their Discussion Paper on SDR and investment labels (DP21/4)4, they revised their proposed position to simplify the regime by reducing the number of labels from five to three: Sustainable Focus, Sustainable Improvers and Sustainable Impact. So, what do these labels mean?
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Customer-facing description
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Customer-facing description
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Customer-facing description
The FCA proposals include the introduction of consumer-facing disclosure requirements (to align with the Task Force on Climate-Related Financial Disclosure (TCFD) reporting requirements), and an ‘anti-greenwashing’ rule to require firms to ensure that the sustainability-related claims are “fair, clear and not misleading”, and are in line with the sustainability profile of the product or service i.e. proportionate and not exaggerated.
On 29 March 2023, the FCA announced in its Policy Statement5 that having received around 240 responses to the consultation that ended on 25 January 2023, it is delaying the publication of the new regime until Q3 of 2023. It is clear that the proposed regime has brought about some questions, so it remains to be seen if and how the regulator adjusts the original proposals.
The new rules apply to firms conducting “sustainability in-scope business” in the UK, including:
These new rules and labelling requirements will apply, at this stage, to asset managers and UK-based fund products and portfolio management services, as mentioned above. However, the FCA have been clear that they may look to expand the new regime in future6.
The current FCA proposals do not apply to overseas products which are marketed in the UK, however the FCA does intend to follow up with an additional consultation paper concerning overseas funds in due course.
That said, new rules proposed by the FCA appear to be compatible with the EU’s Sustainable Finance Disclosure Regulation (SFDR) regime and generally, the proposals being developed by the US (as mentioned below). Similarly, SFDR was introduced to improve transparency in the market and focuses on disclosure requirements, whereas the FCA’s policy is designed to act instead as a labelling regime. It is apparent however, that firms will need to be mindful when comparing the criteria for an investment label across both the SFDR and the new UK regime to ensure they meet the specific regime criteria in line with their business activities.
Under SFDR, there are three different product categories7:
There has been a trend by some firms to downgrade SFDR categories in recent months owing to the complex disclosure requirements. Ahead of the Level 2 rules which came into effect on 1st January 2023, some firms reclassified a number of funds from Article 9 to Article 8, and similarly some Article 8 funds have been downgraded to Article 6 in order to take a more conservative approach8. This trend has been seen in bond funds in particular where it can be more challenging to demonstrate 100% investment in sustainable products per the Article 9 requirements. Taking account of these changes, the European Commission has now announced a review of the SFDR rules that will take place over the coming months, with particular focus on the Article 9 category and whether this will continue to be relevant following these recent changes9.
In May 2022, the US SEC also looked to clamp down on disclosure requirements by proposing to enhance the regulatory framework regarding investment funds and investment advisers’ Environmental, Social and Governance (ESG) strategies10.
Further, the SEC recently released its 2023 Examination Priorities11, which shows an ambitious year of regulatory priorities, including in relation to ESG. If adopted, under the new rules, SEC-registered advisers are to include ESG factors and strategies for investors in fund prospectuses and brochures as well as annual summaries12. Similar to the EU and UK, providing transparency and disclosures on how ESG factors are considered in investment strategies forms a core part of the rules.
Firms should consider and prepare for the incoming UK SDR and labelling regime as well as the upcoming SEC rules (as appropriate). The publication of the final UK rules is now expected in Q3 of 2023, which is a similar publication date expectation as the SEC rules.
When renewing insurance programmes, Insurers will want to know what steps firms are taking to minimise their liability exposure, as well as what processes and procedures they have in place to mitigate ‘greenwashing’ claims.
Whilst preparation plays an important part in any risk management strategy, directors may also want to consider their own personal liability when making statements about how well a firm is adhering to these new regimes. Breaching these new regulations could be costly both from a liability and cost perspective and may impact a firm’s reputation.
Talk to a WTW broker or Claims Advocate to see whether your insurance cover is adequate in case of a regulatory enquiry, or if allegations are made against you.
1 A strategy for positive change: our ESG priorities
3 Sustainability Disclosure Requirements (SDR) and investment labels
4 Sustainability Disclosure Requirements (SDR) and investment labels
5 FCA updates on its Sustainability Disclosure Requirements (SDR) and investment labels consultation
6 CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels
7 A Guide to the EU Sustainable Finance Disclosure Regulation for Financial Institutions
8 SFDR Level 2 standards go live after string of Article 9 downgrades
9 SFDR revamp beckons over fund labelling concerns
11 2023 Examination Priorities Division of Examinations
12 See footnote 10
