The FCA consultation paper on Sustainability Disclosure Requirements (SDR) and Investment Labels (CP22/20)

31 January 2023

The FCA’s consultation on its Sustainability Disclosure Requirements (SDRs) and sustainable investment labels closed yesterday. The consultation marks the final stage of industry engagement before the FCA’s rules are published and the regime begins to take effect from 25 January.

Macfarlanes has submitted a response to the FCA’s consultation. The firm is distinguishable as the only investment management practice in the City which can credibly transcend both the retail and private market fund environments, and our views draw on the breadth of our clients, their products and asset classes.

Here is a summary of our views submitted to the FCA and you can read more in our linked response. We would be happy to talk you through our views or for you to draw on our response in the course of your work.

  • We agree with proposed scope for the SDR disclosures. However, for the benefit of firms in scope of the ESG Sourcebook, we suggest that the FCA explain the rationale for the discrepancy between the scope of product-level reporting under the SDR versus the scope of product-level reporting under the climate-related financial disclosure rules.
  • We recommend the treatment of overseas products should be addressed as a priority and, ideally, the treatment of pension and insurance products would also be resolved before the SDR takes effect.
  • We agree that intentionality should be a condition for the product labels. However, we consider that the definition of intentionality should be expanded to include not only an explicit sustainability objective, but also robust and demonstrable sustainability criteria (which are typically used instead of an explicit sustainability objective in some asset classes, such as real estate).
  • We note the challenges for some strategies in demonstrating both investor contribution and enterprise contribution and recommend that the FCA acknowledge that the balance might fall more towards one or the other contribution, without implying that either contribution is necessarily better.
  • We consider that sustainable investment product labels should be available to multi-asset strategies (which may be investing in a range of “Focus/Improvers/Impact” assets).
  • In relation to the “Focus” label, we consider that the minimum 70% threshold needs to be applied rationally to different fund structures. For closed-ended funds (which typically have a ‘ramp up’ period and divestment period), the 70% limit should apply during the fund’s holding period (i.e., when the fund is fully invested).
  • In relation to “Focus” funds, we suggest that the concept of “stewardship” should be broadened to “engagement”; and that firms should adhere to and disclose membership of robust engagement standards (which may or may not include the FRC’s Stewardship Code, depending on its relevance and applicability to the manager and asset class in question).
  • The terms “assets”, “independently assessed” and “sustainability profile” should be clarified.
  • Where it is not possible for a product to identify specific KPIs at the outset of the product lifecycle (as is typically the case for private equity/venture capital funds), it should be permissible for such funds to qualify for a label if they identify general KPIs at the outset of a deal and specific KPIs at a defined later point.
  • We note the potential for ambiguity when classifying strategies that qualify for more than one product label, and suggest the terminology applied to the labels might be clarified to create a greater distinction, particularly between the Improvers and Impact labels.
  • We request that the FCA clarifies its intention is to exclude non-UK firms from the entity-level disclosure requirements.
  • We consider the marketing rule as currently prescribed is likely to cause significant problems for products with credible sustainability-related characteristics, but which do not meet the qualifying criteria for a label. We consider there is a sufficient framework of existing/incoming rules (including the broadly defined anti-greenwashing rule, and general requirements such as the Consumer Duty), to ensure that managers accurately describe their products and do not overstate their sustainability credentials.

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