In his speech on building trust in sustainable investments, Richard Monks, FCA Director of Strategy, explained how sustainability factors are becoming more and more important to consumers as they make investment decisions. One of the statistics he quoted was that “almost half [of those surveyed] would accept slightly lower returns to make an ethical choice”. He linked this increased focus to the need for consumers to be able to trust the products they are offered and rely on them to perform as they expect, in a natural extension of the "clear, fair and not misleading" and TCF principles to this investment type.
With trust in mind, and the principle objective of preventing greenwashing, the FCA is considering the publication of a set of guiding principles to assist manufacturers, distributors and advisers of products which have, or purport to have, a sustainable objective.
According to Mr. Monks, the principles would cover:
Consistency in messaging and approach. A product's ESG focus should be clearly stated in its name, and then reflected consistently in its objectives, investment strategy and holdings. This is to ensure that a product really does do what "it says on the tin" and matches consumers' expectations.
A product's ESG focus should be clearly and fairly reflected in its objectives. Where a product claims to target certain sustainability characteristics, or a real-world sustainability impact, its objectives should set these out in a clear and measurable way.
A product's documented investment strategy should set out clearly how it will meet its sustainability objectives. This should describe clearly any constraints on the investible universe, including any screening criteria and anticipated portfolio holdings. This should also include the fund's stewardship approach and actions the fund manager will take if investee companies are failing to make the desired progress.
The firm should report on an ongoing basis its performance against its sustainability objectives. This is to give consumers the information they need to understand whether the stated objectives have been achieved in a quantifiable and measurable way.
The firm should ensure ESG data quality, understand its source and derivation, and articulate clearly and accessibly how it is used. This includes the use of ESG ratings in the investment process.
We can also expect FCA guidance and possibly new rules in this space, depending on the results of the FCA's market research. Another "watch this space" for 2021.
firms must ensure their communications are ‘clear, fair and not misleading’. What we don’t expect to see is firms exaggerating their products green credentials. That’s ‘greenwashing’ and misleads investors.