FCA focus on Environmental Social Governance in product design and disclosure
The Director of Strategy at the Financial Conduct Authority (FCA), Richard Monks, recently spoke on the increasing appetite for Environmental Social Governance (ESG) focused financial products and building trust in sustainable investments.
In his speech, Monks discussed the work the FCA is doing in relation to sustainable finance, noting the FCA’s intention to build a regulatory framework “to help firms deliver the reliably sustainable investment products that consumers and investors want” and “to help consumers make better informed choices”.
Themes of Environmental Social Governance
Monks highlighted the desire of consumers to “build back better” in a post-COVID-19 world. He warned, however, that to exaggerate the green credentials of a product would be to engage in “greenwashing” which “misleads investors”. He noted that firms, “must ensure their communications are ‘clear, fair and not misleading’” in relation to ESG products. The concern being that including certain words in the name or objective of a product (such as ‘green’, ‘ESG’, or ‘climate’) “may create expectations among consumers that are not met”.
Monks also highlighted the difficulties involved in comparing companies’ non-financial disclosures where the recommended disclosures of the Taskforce on Climate-related Financial Disclosures (TCFD) are voluntary, commenting that, “significant gaps remain and investors aren’t yet getting the decision-useful information that they need”.
The FCA has committed to tackling the inconsistency of measuring sustainability characteristics, including improving data and information flow into the investment process by, for example, looking at corporate reporting on sustainability. The FCA will also consult on TCFD-aligned disclosures by asset managers and life insurers, to improve firms’ disclosures, and work closely with the government on its commitment to match the ambition of the EU’s Sustainable Finance Action Plan.
Considering Guiding Principles
The speech culminated in Monks noting that the FCA are considering preparing a set of “guiding principles” which would help firms with “ESG product design and disclosure”, and protect customers against potential greenwashing. The FCA has in mind five areas that the principles would cover:
- Consistency in the messaging and approach of products;
- A clear and fair reflection of a product’s ESG focus in its objectives;
- Investment strategies clearly setting out how sustainability objectives will be met;
- Ongoing reporting of firms’ performance against their sustainability objectives; and
- Assuring ESG data quality, understanding source and derivation and articulating clearly and accessibly how it is used.
Financial services firms will undoubtedly be aware of the shift in focus towards ESG that has taken place over the last few years. As Richard Monks suggests, “sustainable investing is surely here to stay”. At present, firms may wish to adopt the TCFD recommendations if they have not already done so, and should monitor whether the FCA do bring in any ESG-related guiding principles in the future.