Sustainability and Responsible Investment

Introduction

The end of 2022 was an opportune time to reflect on the significant programme of work on sustainability and responsible investment that had been initiated by policymakers and industry in 2022, and to look ahead to 2023.

While a number of important announcements were made at Cop26 in Glasgow in 2021, the industry has since been occupied with the question of what it means to be a Net Zero-aligned Financial Centre. In answer, the Government established a Transition Plan Taskforce in April to develop a “gold standard” for private sector climate transition plans in the UK and the IA was pleased to be appointed to its Delivery Group.

Alongside this, the FCA invited the IA to join the Disclosures and Labels Advisory Group (DLAG) to advise the regulator on the development and implementation of sustainability disclosure requirements and a labelling system for sustainable investment products.

Throughout the year, we have continued to offer practical support to members through our forums on SFDR Implementation, TCFD Implementation and Net Zero and to engage with policymakers on efforts to develop a global baseline of sustainability disclosures through the International Sustainability Standards Board (ISSB). Government consultations on updating the Green Finance Strategy and an independent Net Zero Review also took place and they are likely to shape the landscape for green finance as we look to 2023.

We unpack some of these issues in more detail in the following sections.

Further information:

Carol Thomas
Head of Sustainability & Responsible Investment
carol.thomas@theia.org

Our approach across this full range of sustainability and responsible investment issues is to seek to understand the challenges members face, provide opportunities for knowledge building and to seek opportunities to shape policy in the interests of the industry and its clients. We do this through our committees and forums and our flagship event is the annual Sustainability and Responsible Investment Conference. We were delighted that 2022’s conference was attended in person by more than 200 people to hear from government, regulators and industry figures from the UK and around the world to discuss the big issues in sustainability. We will be gathering again this year on 25 May to consider how we can deliver sustainable and responsible investments for our clients during times of adversity. I hope to see you there.

FCA Consultation Paper on Sustainable Disclosure Requirements and Labels

Perhaps the most significant development this year was the publication in October of the FCA’s consultation paper (CP) on SDR

and Investment Labels.

The IA welcomes the aim of what the FCA is trying to achieve in this very important area.

Investment managers are committed to bringing clarity, transparency and consistency to the way industry describes and delivers sustainable and responsible investment products to clients.

It is this commitment to clients and client outcomes that has dominated investment managers’ thinking and work on all aspects of CP22/20 on SDR and investment labels. We are grateful for the inclusive and positive work undertaken to date by the FCA as part of this policy’s development process and we welcome the proposals.

With our response, we reiterate our support for a retail market labelling system and a clear disclosure regime that ensures that together, we raise standards and improve consumer confidence in this market.

However, we are concerned that without

Further information:

Carol Thomas
Head of Sustainability & Responsible Investment
carol.thomas@theia.org

Flora Tudhope
Policy Adviser, Sustainability & Responsible Investment
flora.tudhope@theia.org

IA website hub page can be found here.

modifications CP22/20 will not result in an approach that serves consumers effectively or facilitates the wider process of stewardship and capital allocation as part of the transition to a more sustainable future, considerate of net zero and positive social contributions. This, in turn, may have an adverse impact on broader UK competitiveness.

We propose seven key changes that could make a positive difference to the effectiveness of the SDR regime. These are:

Adopt a pragmatic approach to agency and influence and move away from specific language on channels for investor contribution;
Introduce more inclusive and less prohibitive naming and marketing rules;
Accommodate funds that invest in a blend of Improving and Focus assets within the Sustainable Focus label;
Incorporate new sustainability-related fund information into existing product disclosures;

Recognise current data and methodological limitations and allow firms to use internal frameworks as a credible standard for environmental and social sustainability;
Adopt a more pragmatic approach to Impact;
Recognition of importance of cross-border distribution.

The full IA response can be found here. We want to take this opportunity to thank all members that provided feedback and contributed to the formulation of this response. We shall keep members informed of next steps. In the meantime, please do not hesitate to get in touch if you have any questions or further comments.

ESMA consultation – guidelines on funds’ names using ESG or sustainability-related terms

In November 2022, the European Securities and Markets Authority (ESMA) published a consultation on its draft guidelines on the usage of ESG or sustainability-related terms in fund labelling.

Further information:

Carol Thomas
Head of Sustainability & Responsible Investment
carol.thomas@theia.org

Flora Tudhope
Policy Adviser, Sustainability & Responsible Investment
flora.tudhope@theia.org

IA website hub page can be found here.

This consultation seeks to develop the guidelines published by ESMA in May 2022 as part of its supervisory briefing on sustainability risks and disclosures. The briefing contained, inter alia, principles-based guidance for fund names containing ESG and sustainability-related terms. ESMA's latest consultation seeks to build upon this guidance by proposing quantitative thresholds criteria where fund names use ESG or sustainability-related terminology.

Key proposals include:

A quantitative threshold of 80% for the use of ESG related words;
An additional threshold of 50% for the use of “sustainable” or any sustainability-related term, as part of the 80% threshold;
An application of minimum safeguards to all investments for funds using such terms (exclusion criteria);
Additional considerations for specific types of funds (index and impact funds).

The consultation states that its proposed guidelines are not intended to interfere with

SFDR and they are using the Regulation on cross-border fund distribution (EU)2019/1156) and the UCITS (Article 14(1)(a)) and AIFMD (Article 12(1)(a)) frameworks as the basis for the guidelines. Ultimately ESMA wants to avoid the risk of misrepresentation that may lead to greenwashing and they view a review of SDFR as too long to wait to introduce these proposed measures.

While the consultation references developments in this space in other jurisdictions, including the FCA's proposals in CP22/20 on how sustainability-related terms are used in product names and marketing, it remains to be seen how aligned ESMA will make the final guidelines with what, for example, the FCA may come out with on restrictions relating to fund names in UK rules.

The ESMA consultation closes on 20 February 2023 and the IA is responding via EFAMA. The guidelines will become applicable from 3 months after the publication of their translation on the ESMA website with existing funds then having a six-month transition period.

Further information:

Carol Thomas
Head of Sustainability & Responsible Investment
carol.thomas@theia.org

Flora Tudhope
Policy Adviser, Sustainability & Responsible Investment
flora.tudhope@theia.org

IA website hub page can be found here.

Transition Plan Taskforce

The IA continued involvement in the Government’s Transition Plan Taskforce (TPT) as a member of its Delivery Group. The TPT was launched earlier in 2022 to develop a “gold standard” for private sector climate transition plans in the UK and will also inform and build on international disclosure standards. Following changes in Government, the TPT is now co-chaired by Baroness Penn, who was appointed Parliamentary Secretary to the Treasury in October.

The Delivery Group is made up of experts across core stakeholders including investment management, academia and regulators, who are contributing to TPT workstreams. In addition, the IA is a member of workstreams responsible for the drafting of a sector-neutral framework, and providing more detailed guidance on best practice for a broad range of sectors.

The TPT published a draft Disclosure Framework and accompanying Implementation Guidance to coincide with Cop27. These drafts will be open to

consultation until 28 February 2023, with a view to finalising the framework in 2023. The IA will respond to this consultation.

COP27

In November Egypt hosted Cop27, ending the UK’s two-year presidency of the UN Climate Change Conference and marking 12 months since Glasgow hosted Cop26. While the Egyptian presidency’s programme was less focused on private finance – and it would appear there were fewer representatives of private finance in attendance as a result – there were still a number of publications and topics of debate which will be relevant to the industry. Updates on Cop27 activity were provided through the IA’s Path to Net Zero bulletin newsletter.

Prior to the conference we knew that financial commitments from developed countries on mitigation and adaptation had not been met, and UNEP stated that any effort to strengthen national emission reduction targets had made "a negligible difference." The UK Cop26 President has said that negotiators in Egypt had to "fight relentlessly [to] keep 1.5 degrees

Further information:

Paul Scaping
Public Policy Specialist
paul.scaping@theia.org

IA website hub page can be found here.

alive." The mood at the end of the summit was not particularly celebratory.

The summit’s decision document, the Sharm el-Sheikh Implementation Plan, contained notes of concern relating to the funding for adaptation and loss and damage. Initial agreement was reached on funding arrangements for responding to loss and damage associated with the adverse effects of climate change, negotiations took place on a future target for climate finance to replace the current $100bn per year pledge after 2025, and negotiations continued on technical aspects of the agreement reached in Glasgow on carbon trading.

While the summit included scrutiny of the progress of initiatives like the Net Zero Asset Managers initiative and GFANZ, it was muted and there was greater focus on a more general report from the High-Level Expert Group on the Net Zero Emissions Commitments of Non-state Entities.

The IA will now reflect on the outcomes of Cop27 and the presidency agenda for Cop28

and work with the Climate Change Working Group to update the IA’s Climate Change Action Plan for 2023.

The IA will now reflect on the outcomes of Cop27 and the presidency agenda for Cop28 and work with the Climate Change Working Group to update the IA’s Climate Change Action Plan for 2023.

NET ZERO

As part of the IA’s ongoing commitment to support members who have made net zero commitments or are considering the challenges related to the net zero transition for investment managers, the IA’s Net Zero Forum continues to host sessions to enable peer-to-peer knowledge sharing and provide a platform for external speakers.

In November speakers from the FCA, Mark Manning (Technical Specialist, Sustainable Finance and Stewardship) and Claudia Chapman (Technical Specialist, ESG Division and Advisor, Asset Management Supervision) discussed the role that investor stewardship can plan in achieving net zero. Claudia

Further information:

Paul Scaping
Public Policy Specialist
paul.scaping@theia.org

recently joined the FCA on secondment from the Financial Reporting Council, where she is Head of Stewardship and leads the team responsible for setting and maintaining the UK Stewardship Code. Mark and Claudia presented on the evolving expectations of the stewardship regulators on the transition to net zero and how engagement can encourage companies to transition to net zero.

Net Zero Forum members, along with the Climate Change Working Group and the Sustainability & Responsible Investment Committee, have expressed concerns about the reputational and legal risks which are emerging in relation to net zero commitments. This includes, but is not limited to, questions around fiduciary duty. Following discussions with each of these groups towards the end of 2022, the IA will be looking at these issues in more depth in 2023, both through the Net Zero Forum and in the development of advocacy positions. The first Net Zero Forum of the year will be joined by Tom Gosling (London Business School and FCA ESG Advisory Committee) and colleagues to discuss his views on net zero commitments.

Further information:

Carol Thomas
Head of Sustainability & Responsible Investment
carol.thomas@theia.org

Flora Tudhope
Policy Adviser, Sustainability & Responsible Investment
flora.tudhope@theia.org

Paul Scaping
Public Policy Specialist
paul.scaping@theia.org