(Bloomberg) -- The UK’s proposed rules to eradicate greenwashing in investment funds set a higher bar than those already enforced in the European Union, according to one of Britain’s biggest and most influential finance industry groups.
The UK Sustainable Investment and Finance Association, whose members represent over £19 trillion ($23 trillion) in assets, said the upcoming Sustainability Disclosure Requirements (SDR) will enhance transparency for investors. While UKSIF criticized some parts of the Financial Conduct Authority’s proposals, it also praised the overall approach when held up against the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The proposals are “a positive departure from the arguably looser criteria” for ESG fund categories set out in the EU’s SFDR, which include an “unclear definition of ‘sustainable investment’,” UKSIF said on Wednesday in a response to an FCA consultation.
“We see opportunities for the UK should it establish a world-leading regime that can build on other jurisdictions’ frameworks, with potential for the UK to proactively shape other countries’ approaches to disclosures and labeling in the coming years,” it said.
The UK’s financial watchdog unveiled its ESG rules for funds in October, with a consultation concluding Wednesday. Sacha Sadan, the FCA’s director of ESG, told Bloomberg the UK was trying to sidestep the kind of confusion that’s upended the EU’s fund market due to its disclosure categories, known as Article 6, 8 and 9. Sadan said the upshot is that the EU has been left with an ESG fund “contest rather than actually a reflection of different things for different consumers.”
The UK’s Proposed ESG Labels:
- Sustainable Focus - funds can use this label if they invest mainly in assets that achieve a high standard of sustainability
- Sustainable Improvers - a label intended for investments in assets that may not be sustainable now but which the fund aims to help improve
- Sustainable Impact - a label that’s reserved for funds that can prove they’re targeting solutions to social and environmental challenges
The European asset management industry has faced over $140 billion of downgrades from the strictest Article 9 category in recent months, and uncertainty remains over what constitutes a “sustainable investment” under the regulation. UKSIF said the FCA could avoid similar confusion by learning from the EU experience, where “clarifying guidance and Q&A’s from EU authorities has often contradicted the original rules.”
“It is essential the final rule recognizes the diversity of investment strategies that enable institutional investors—including pensions, foundations, and endowments—to achieve their sustainability goals,” said Jillien Flores, Head of Global Government Affairs at the Managed Funds Association. “We look forward to continuing to engage with the FCA to emphasize the importance of implementing a regime that is interoperable with the frameworks in the US and EU.”
Among UKSIF’s recommendations were:
- The FCA should clarify how the rules will impact overseas funds as soon as possible, warning that products registered in the EU and marketed in the UK could have an unfair advantage
- The UK government needs to enforce appropriate corporate disclosure obligations so investors can evaluate companies’ sustainability credentials
- More clarity is needed on appropriate metrics for the ‘Sustainable Improvers’ label, to define what an improving fund looks like in practice. Otherwise the tag risks becoming a “catch all” label, with some funds exaggerating the impact of their engagement activities
--With assistance from Lisa Pham.
(Adds comment from MFA in seventh paragraph.)
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