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ANTI Greenwashing : 5 Take Aways from the new Sustainability Disclosure Requirements for investments


On the 28th November the FCA ( Financial Conduct Authority ) published their long awaited policy statement on the Sustainability Disclosure Requirements and invesment product labelling, a package of measures to improve the trust and transparency of sustainable investment products and minimise greenwashing. This is a long read, due to the far reaching policies and their ability to change the retail investment sector.



Photo Credit : Stock Photo Vecteezy


Hello, my name is Jill, director and life centred financial planner at Big Picture Financial Planning, working with clients to plan for their future, have the best life possible with the money that they have, align their investments with their values, manage risk and protect the ones they love. 


Having been personally involved with initial consultations, during my tenure as a member of UKSIF's ( UK Sustainable Investment and Finance Association) policy committee, the publication of the SDRs ( Sustainable Disclosure Requirements) are welcomed. It gives hope at a time when the government under Mr Sunak, seems to have made a U Turn on green finance. The publication of the SDRs, builds on the work contained in the government's 2019 report, Greening Finance - A Road Map to Sustainability and confirms the trajectory of travel, towards the ambition of a whole economy approach to sustainability and the UK's ambition to be a net zero leader.


The publication is 122 pages long, with the first raft of recommendations due to come into effect from May 2024, with some further consultations initiated to look at the actual implementation practiclaties and training requirements. This publication has the power to change the trajectory of financial advice and will make advisers " sit up and listen " ( citation: Isabel Baxter : Professional Financial Advisor - 30th November 2023 - "FCA's SDR Regulation Will Make Advisers Sit Up and Listen There Has To Be a Fundamental Re-educating of the Adviser Community" - . At Big Picture Financial Planning we are thankfully ahead of the curve but just going through the new ESG and Sustainable Investment course from the Chartered Insurance Institute.


So, what are 5 key take aways that will benefit investors and support a shift of capital towards a sustainable transformation of the economy.


1. Sustainable Claims Must be Fair, Clear and not Misleading.


Research for the government's report "Investing in a Better World", 70% of those asked, wanted their money to go towards making a positive difference to people or the planet, alongside generating a financial return yet only 13% of people has already made sustainable investments, they found barriers to understanding and comparing options were difficult.


The SDRs aim to provide consumer information to make it easier to understand the aims of the fund or model portfolio they are investing in and therefore easier to decide whether or not this matches their personal aims.


It is no longer acceptable to put a green in the title of the fund and a picture of wind farms and market a fund as being sustainable.



2. Anti Greenwashing


The Cambridge dictionary defines greenwashing as an action : "to make people believe that your company is doing more to protect the environment than it really is."


I have personally witnessed a race by fund managers to get an ESG ( Environmental, Social And Governance) offering into the market and sometimes, as one investment manager called it, "a dusty offering" of an already available fund, for fear of being left behind and missing out some of the market share. An approach which not only glosses over environmental stewardship credentials but excludes what the investor is trying to achieve.


With an influx of investment into ESG funds, underlying companies in the fund's holding have access to cheaper capital, without necessarily having to prove their credentials.


A fund manager will have a duty to prove sustainability credentials and will have to scrutinise the sustainability credentials of companies that they hold in their portfolio. It will no longer be acceptable to "hold" a company that makes green widgets and hope for the best. It will be easier to see which fund managers have the ambition to challenge and engage with the companies they invest in, over their environmental impact and make sure the companies they hold, are making a positive difference. Then you the investor will know whether or not the fund is right for you. Are companies along for a free ride and cheap capital because they are included in a "green fund " or are they pushing the boundaries and helping to solve some of the environmental challenges ? Hopefully the SDRs will make it easier to find out.


Anti greenwashing rules will also apply to firms offering sustainability services.



3. Four investment Labels to help navigate the sustainability landscape


Its going to take some time to get current funds and investment products aligned with the labels , which are : Sustainability Focussed, Sustainability Improvers, Sustainability Impact and Sustainability mixed goals. they are designed to help consumers differentiate between differnet sustainability objectives. The labels are not designed to be a heirarchy of any sort.


To qualify for a sustainability fund label, the fund or portfolio of funds will be required to have a minimum 70% of relevant assets. For a focussed fund these will be assets that are environmentally or socially sustainable as determined by a robust, evidence based standard. For improvers they will need to hold 70% of assets that have the potential to become environmentally or socially sustainable by a robust evidence based standard and the fund managers will have to demonstrate how they are measuring this improvement. Finally the impact label will be reserved for funds that can demonstrate a positive measurable environmental and social impact.


The mixed goal label has been added for multi asset funds where several of the approaches may be included. At the moment Model Portfolio Services are not included in the rules but further consultation is ongoing.


Ethical funds are not included in the labels unless they have a sustainability objective.


There will of course be unlabelled funds and interestingly they will need to state that they not labelled and the reason for this.


The FCA are not prescribing what evidence based standards can / should be used. It is a start of a new regime and I see the labelling system being very important in giving advisers greater confidence in the sustainability aims of funds and how these map and mach investor objectives.



4. The Power of a Name


In 2005 the Journal of Finance published an academic study, "Changing Names with Style: Mutual Fund Name Changes and Their Effects on Fund Flows" which concluded that a careful name change of a fund to align with a new hot investment style or current trend, could halt negative outflows and indeed increase inflows by upto 30%, with no increase in performance. A change of name alone was shown to attract more funds from investors attracted by a cosmetic name change.


No doubt the FCA had this study in mind when setting out their naming and marketing rules to ensure the inclusion of sustainability related terms in a fund name or marketing material is accurate.



5. Shake, Rattle and Roll.


The SDR rules have the potential to shake up the retail investment sector and provide greater clarity and transparency over an investment fund's aims and objectives when it comes to environmental and social sustainability. It will make fund managers more accountable with their decisions. No more dusty offerings or misleading fund names. No more holding companies without holdoing the companies to account with the progress or otherwise they are making in their own sustainability journey.


Hopefully greater disclosure will allay fears of greenwashing and also improve consumer trust.


There will be a lot of changes in consumer facing literature, communications and some hard work ahead and if handled well with the addition of benchmark and industry standards in place, it could be transformative and give confidence to advisers and consumers, to increase investment in sustainability and access some of the opportunities this presents and hopefully create a future worth living in.


Please be aware that the value of investments can go down as well as up as can than income generated from them. This article is for information only and is not investment advice. Advice should be tailored to your own aims and objectives and these should be discussed with a suitably qualified adviser.



 

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