FCA’s New Fund Labelling: Will it stop the greenwashing?
Curious news emerged recently on ESG fund labelling. With COP28 kicking off, the UK's Financial Conduct Authority confirmed plans to press ahead with an ambitious new labelling regime to reduce greenwashing. Then Reuters reported that the EU has put it's own plans on hold - citing "compliance fatigue". What's going on?
There's no doubt that categorising investment products is an incredibly tricky proposition. But the current mess of ESG/sustainable/saving-the-world-type labels is in real need of reform. I've been astonished looking at the holdings of some so-called "sustainable" products. The marketing is bold but the underlying reality is often not (think tobacco stocks, lots of big oil, etc., small tweaks to benchmarks, zero engagement etc.).
So four new labels are slated for use in the UK from next August to help clear things up:
Sustainability Focus: "products investing mainly in assets that are sustainable for people and/or the planet". How on earth will this be defined - I know you are wondering? "At least 70% of the product’s assets must be selected with reference to a robust, evidence-based standard that is an absolute (as opposed to a ‘relative’) measure of environmental and/or social sustainability". Hmmm....
Sustainability Improvers: "assets that may not be sustainable now [but have] an aim to improve their sustainability for people and/or planet over time". I.e. put the naughty stuff here.
Sustainability Impact: "an explicit objective to achieve a positive, measurable contribution to sustainable outcomes". Yes please.
Sustainability Mixed Goals: a combination of the others, with a breakdown provided. For those who just can't decide.
Will these labels reduce greenwashing? Probably. Will they resonate with consumers? I'm not sure.
The one to watch is "sustainability focus". I couldn't confidently tell you of a "robust, evidence-based standard that is an absolute measure" of social and environmental sustainability that would work for all assets in an ESG fund. Taxonomies can help but the Annex implies that ESG ratings and "in-house" methodologies can be used. Yikes!
In a sentence that definitely wasn't spell checked, the FCA added: "all labelled categories aim to improve or pursue positive environmental and/or social ouctomes [sic] – not just Sustainabilty [sic] Impact products." I wonder how far this will be true. With a focus on financial materiality, most ESG products integrate ESG criteria and tilt selections towards assets to improve risk-adjusted returns. Only the impact category starts with an outcome objective. In fact, very, very few asset managers are able to evidence how their activities "improve" real-world outcomes. That's because most of them don't.
So as these labels roll out, it will be interesting to see how far the investment world is prepared to apply, explain and evidence them. The regulators will be watching.
FCA’s Framework for the New Labelling