Sustainability and Responsible Investment

SDR and Investment Labels Final Rules

On 28th November, the FCA published its final rules on Sustainable Disclosure Requirements (SDR) and investment labels. The SDR final rules introduce a package of measures to help consumers navigate the market of sustainable investment products. These measures include:

Labels for sustainability funds under the following headings: Sustainability Improvers; Sustainability Focus; Sustainability Impact; Sustainability Mixed Goals.
Naming and marketing rules for funds with a label or funds using sustainability-related terms in their naming and marketing.

An anti-greenwashing rule for all FCA-authorised firms, clarifying existing FCA
rules that (sustainability) claims should be clear, fair and not misleading.
Disclosures at several different levels: consumer facing disclosure; detailed product level disclosure; and entity-level disclosure.
Requirements for distributors to ensure that product-level information is made available to consumers.

The IA is supporting members with the implementation of these rules via a number of channels:

The IA held a joint webinar with the FCA on the final rules on 11th December.
The IA has established an SDR Implementation Forum – a discussion group where members can discuss experiences, challenges and best practice related to SDR implementation. First meeting to take place in early January 2024.
The IA, in partnership with Eversheds Sutherland, is developing industry guidance to help members implement the final rules.

Further information:

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

IA website hub page can be found here.

The IA has set up an informal forum with other relevant trade bodies to see where synergies can be made.
Further consumer testing will be undertaken on the sustainable fund labels to help members with further guidance on how to communicate the labels effectively to end investors.
The IA is updating its training offering for members on sustainability related topics, including on SDR.
SDR will be a key discussion topic at the IA Sustainability Conference on 25 April 2024.

EU SFDR Review and IA Plans to Respond

The European Commission published its expected consultation on the implementation of the Sustainable Finance Disclosure Regulation (SFDR) in September. The consultation covers key areas such as current requirements of SFDR, including disclosure of principal adverse impacts (PAIs); the cost of disclosures under the SFDR today; and the quality of data and estimates. The consultation also covers interaction with other sustainable finance legislation and potential changes to

the disclosure requirements for financial market participants at both entity and product level. Contrary to the current regime, the consultation suggests potential establishment of a categorisation system for financial products, similar to the approach being considered by the FCA in its Sustainable Disclosure Requirements (SDR) regime.

Following extensive member engagement, the IA submitted a response on 15 December. While many aspects of SFDR are flawed, it is clear there is little appetite for a wide scale overhaul of SFDR. There is a preference to fix elements of SFDR than start from scratch, in particular, due to the need for consistency in the information given to end investors rather than constant change. Key IA views include:

Entity level reports: we do not believe that the disclosure of mandatory and opt-in Principle Adverse Impact (PAI) indicators at entity-level is useful and therefore, should be removed from future iteration of SFDR.

Further information:

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

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

IA website hub page can be found here.

Product level disclosure: we do not want to see uniform disclosure requirements for all financial products offered in the EU over and above existing requirements, regardless of a funds sustainability-related claims or any other considerations. We do not support having product-level disclosures expressed on a scale as it would be extremely challenging to determine which objective information should be expressed on a scale given the wide array of ESG issues and the subjective nature of these issues.
While the consultation doesn’t ask about scope, IA members are calling for segregated mandates to be out of scope of the next iteration of SFDR.
Product categorization: members broadly support Approach 1 which is to split categories according the to the type of investment strategy of the product, similar to the FCA SDR approach. Whilst industry recognizes a lot of work has gone in to implementing Article 8 and 9, there is no support for a product categorization along Approach 2 which would be to convert Articles 8 and 9 into formal product categories.

Three of the proposed categories are similar to FCA SDR Sustainability Focus, Improver and Impact. However, the Commission is proposing a fourth label, Category C, focused on exclusions. There is large support for this category from ourmembers, in an EU voluntary categorisation regime, provided they are not mandatory exclusions. This should be coupled with clear minimum criteria to ensure that exclusions alone are meaningful as a sustainable approach. Exclusionary funds provide important benefits to investors seeking to both (1) mitigate their ESG risk or express their preferences, and (2) benefit from the long-term returns generated by high-quality, low-cost investing in passively managed, broadly diversified, index funds.
In terms of the labels being mutually exclusive, while members support funds only have one label/category, the ESG strategies/tools/underlying funds that a product may employ to achieve its intention should not be mutually exclusive.

Further information:

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

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

IA website hub page can be found here.

MiFID 2: regarding to what extent should sustainability preferences under MiFID II and IDD refer to those possible sustainability product categories - the way sustainability preference have been defined in MiFID clearly does not align directly to Article 8 and 9 funds and has proved quite difficult for firms to interpret. We do not want an approach that prevents clients from investing in, for example, ESG risk-managed strategies, if they are in fact the right strategies for their preferred investment outcomes (i.e. strategies without a dual objective). Ideally, “sustainability preferences” should allow for strategies covering the full breadth of possible investment outcomes that investors may be targeting in line with their particular sustainability needs and suitability preferences process should allow investors to be matched with the right strategies for them.

Naming and marketing rules: similar to the views we gave to the FCA for SDR, any prohibition on product names and marketing materials by restricting the use of ESG-related terms to products adhering to the categorisation regime could be disproportionate to the harms EU regulators are trying to mitigate/avoid.

Ongoing Work on ESG Data and Ratings Providers

UK ESG Data and Ratings Code of Conduct

A year in the making, the finalised UK Code of Conduct for ESG Data and Ratings Providerswas published on 14 December and ICMA has agreed to take ownership of the Code going forward. The IA has been a member of the industry working group that helped to develop the Code. In line with IOSCO’s recommendations, the Code is structured around four key outcomes:

Further information:

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

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

IA website hub page can be found here.

Good Governance: ESG ratings and data products providers are expected to ensure appropriate governance arrangements are in place that enable them to promote and uphold the Principles and overall objectives of the code.
Systems and Controls: ESG ratings and data products providers are expected to adopt and implement written policies and procedures designed to help ensure the issuance of high quality ESG ratings and data products.
Management of Conflicts of Interest: ESG ratings and data products providers are expected to identify, avoid or appropriately manage, mitigate and disclose actual or potential conflicts of interest that may compromise the independence and objectivity of ESG ratings and data products providers’ operations.

4. Transparency: ESG ratings and data products providers are expected to make adequate levels of public disclosure and transparency a priority for their ESG ratings and data products. This includes their methodologies and processes to enable users to understand the product and any associated potential conflicts of interest, while maintaining a balance with respect to proprietary or confidential information, data and methodologies.

To try and ensure global interoperability and coherence, the meetings through out the year have been attended virtually by observers from different jurisdictions, including the Monetary Authority of Singapore (MAS), the Japanese Financial Services Agency (JFSA) and the Ontario Securities Commission (OSC), and the U.S. Securities and Exchange Commission (SEC). In the absence of a UK regulatory framework for ESG data and ratings providers, we see the Code providing the above key outcomes until such time as there is a regulatory framework in the UK for those providers.

Further information:

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

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

IA website hub page can be found here.

EU regulatory frameworks for ESG Ratings Providers

The European Commission published a proposal for an ESG Ratings Regulation in June 2023 and the IA submitted a response to the draft proposals to the Commission in early September with our key views on the proposals. Development of the proposals are continuing at pace in the EU. Key points include whether to increase the scope both ESG ratings and data providers (as current scope only covers ESG ratings providers). Proposals also include how the ESMA supervisory framework should framed, obligations for independence and conflicts of interest and principles on integrity and reliability. The treatment of investment managers internal ratings is also a key focus for the IA. It is likely that the EU legislative process will aim to finalise this file in Q1 2024 ahead of the EU elections next year and the current colleague of Commissioners change next year as well.

UK Transition Plan Taskforce

The IA continues to work as a member of the Transition Plan Taskforce (TPT) through its delivery group and as a member of a working group producing sector guidance for investment manager transition plans.

The TPT published the final version of its Disclosure Framework in October, following a period of consultation. The TPT was established by the UK Government in 2022 to develop guidance on a "gold standard" for private sector climate transition plans. The FCA (which participated in TPT) is encouraging firms to “engage early” with the framework, which it says, “provides a set of good practice recommendations to help companies across the economy make high quality, consistent and comparable transition plan disclosures”. The regulator has confirmed its previous commitment to “draw on” the TPT framework as it develops disclosure expectations for listed companies, investment managers and FCA-regulated asset owners.

Further information:

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

IA website hub page can be found here.

The working group producing sector guidance for investment managers, is now drawing to a close with the document out for market consultation. In December, the IA hosted a webinar with the TPT to build awareness of the guidance. The TPT's current mandate ends in February 2024, and the IA will continue to work with policymakers to ensure the appropriate policy environment is build around the use of transition plans in the UK.

Supporting the Real Economy Transition

We continue to support IA members in their commitments to help achieve a net zero-aligned and nature positive economy through policy advocacy, including that undertaken indirectly by their trade associations.

In the last quarter, our engagement with policymakers has included developing understanding of the role of natural capital, and emphasising the importance of a clear policy underpinning for the green transition. In an informal coalition with organisations including WWF, E3G, UK Finance and the CBI,

the IA has argued for the Government to do more to set out its plans to achieve low-carbon investment, including tracking financial flows towards the UK’s transition priorities. We have held meetings with ministers and officials in support of this objective.

Most recently, the UK Parliament Environmental Audit Committee supported a central element of this call in the report of its inquiry on the financial sector and the UK’s net zero transition, when it recommended an independent body to be tasked with tracking climate- and nature-related financial flows, as well as investment in high-carbon projects. The IA has been engaging with this inquiry since it was launched in 2022.

Most recently, we responded to the UK Government Department for Energy Security and Net Zero’s call for evidence on the value of incorporating scope 3 emission reporting in the UK’s sustainability disclosure requirements. We will also continue to engage with policymakers responsible for the UK’s Transition Finance Market as it launches under the recently announced chair, Vanessa Havard-Williams, in early 2024.

Further information:

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

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

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

UN Climate Change Conference

In December, the IA attended the UN climate change in Dubai where we were confirmed as official observers during the opening plenary meeting. Organisations must be admitted as observers to the UN climate change conference to send representatives to attend its main annual meeting, known as COP. Observers are also able to formally participate in consultative processes throughout the year building to the next COP.

The IA will now be working with its Climate Change Working Group and Sustainability and Responsible Investment Committee to further identify the issues on which it will be a priority for the IA to engage. The UN conference and associated initiatives consider issues including carbon markets, the integrity of business climate commitments, energy policy, and the provision of private and public funding for mitigation, adaptation and repairing loss.

We will also spend time in 2024 developing relationships with the policymakers from UK Government and international bodies who participate in the climate conference. In Dubai,

we were pleased to organise with ICI Global a roundtable for members with Rodrigo Buenaventura (Chair of the IOSCO Sustainable Finance Task Force), Martin Moloney (IOSCO Secretary General) and Emmanuel Faber (ISSB Chair).

CMA FINAL GUIDANCE ON ENVIRONMENTAL CO-OPERATION

In October, the Competition and Markets Authority (CMA) published its final guidance on environmental sustainability agreements. The Guidance recognises that initiatives which exist to provide a common framework to help businesses set and disclose environmental targets (including those which allow for the unilateral setting, disclosure and reporting of participants’ targets) are unlikely to have an appreciable adverse effect on competition.

The competition regulator consulted on draft guidance earlier this year and the final guidance reflects several elements of the IA’s feedback. A new section of the Guidance – not included in the previous draft – covers agreements between shareholders on

Further information:

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

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

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

promoting corporate policies that pursue environmental sustainability. It states that an agreement between shareholders to vote or lobby jointly for corporate policies that support environmental sustainability objectives will be unlikely to infringe competition law. The Guidance has also been updated to state that a trade association

providing "legitimate assistance, facilitation or support" to firms taking part in an environmental sustainability agreement is unlikely to raise competition concerns.

While members are advised to familiarise themselves with this Guidance, the CMA will operate an open-door policy for informal guidance on sustainability agreements where there is uncertainty on the application of the Guidance. The FCA has also welcomed the guidance and committed to having regard to the CMA's approach when exercising its own competition powers. This clarification of how the two regulators would exercise their duties was requested by the IA.

Further information:

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

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

IA website hub page can be found here.