The Financial Conduct Authority (FCA) has published a discussion paper to seek views on new sustainability disclosure requirements (SDR) for asset managers and FCA-regulated asset owners, and a new classification and labelling system for sustainable investment products.

In particular, the FCA is seeking views on the potential design of sustainable investment labels, consumer-facing disclosures for investment products, and client- and consumer-facing entity and product-level disclosures.

The discussion paper will inform the development of policy proposals for formal consultation in Q2 2022, and will form part of the SDRs as outlined in the government’s Roadmap to Sustainable Investing.

In the discussion paper, the FCA acknowledged that financial services have an important role in the transition to a more sustainable future, noting that firms are also providing an increasingly diverse range of products in response to growing consumer demand.

However, it warned that there is also a risk of harm if the market responds to rising demand without adequate regulatory checks and balances and delivers poor outcomes to consumers.

In light of this, the new sustainability disclosures and labels are expected to ensure consumers have enough information to assess which products meet their needs and hold firms to account for their sustainability claims.

Under its proposals, certain investment products will be required to display a label reflecting their sustainability characteristics, which is expected to complement the entity- and product-level SDR disclosures.

The FCA will develop and implement the labels, building on existing work under other domestic and international initiatives by industry and official sector initiatives

The new disclosures and sustainable investment labels would apply to certain asset managers and FCA-regulated asset owners, and their investment products.

The proposals have been welcomed by some industry organisations, with Interactive Investor head of pensions and savings, Becky O’Connor, emphasising that "normal investors who want to do their bit have been crying out for a trustworthy, official label and set of standards that will give them assurance an investment is genuinely green".

She stated: “Without universally established definitions, investors won’t feel they can always trust something that comes with a green label to be truly planet-saving. Ratings systems exist and are useful but they often produce conflicting results, which just leads to further confusion.

"For example, some sustainable funds that are truly making a positive impact might not score very well according to some measures; while others with holdings that could even include fossil fuels might come out with a higher sustainability rating.

"This can be seriously off-putting for some investors, who might reasonably expect a fund with ‘sustainable’ in the title to exclude fossil fuels companies altogether.

“This work by the FCA to produce a discussion paper is very welcome and we hope it will bring confidence to those investors who are enthusiastic about the prospect of investing in the change they want to see.”

Hargreaves Lansdown head of investment analysis and research, Emma Wall, also said that it is "fantastic" to see the regulator giving responsible investing the attention it deserves.

“We believe investing with environmental, social and governance issues in mind is simply good risk management – leaders who run businesses conduct aware, with the climate and society in mind, are likely to have sustainable revenues and profits," she continued.

“Investors have recognised this too – amongst our clients flows into responsible investment funds have gone up 6,000 per cent in the last five years.

"We welcome the particular focus on transparency, which we know investors are calling for, as well as the wider commitment to supporting the transition to a greener, cleaner economy.”

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