January 19, 2021

Volume XI, Number 19

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January 19, 2021

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January 18, 2021

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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 productsThe 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:

  1. Consistency in the messaging and approach of products;
  2. A clear and fair reflection of a product’s ESG focus in its objectives;
  3. Investment strategies clearly setting out how sustainability objectives will be met;
  4. Ongoing reporting of firms’ performance against their sustainability objectives; and
  5. Assuring ESG data quality, understanding source and derivation and articulating clearly and accessibly how it is used.

Comment

 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.

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© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 342
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About this Author

Garon Anthony Litigation Attorney Squire Patton Boggs Birmingham, UK
Partner

Garon is a partner in the Litigation Practice Group. He advises clients across the full range of commercial dispute issues, including cyber liability/data breach, professional negligence, banking, pensions and insurance.

Garon regularly acts for clients who are subject to investigations or disciplinary proceedings by national and international regulators, including most recently the Financial Conduct Authority, the Financial Reporting Council and the Dubai Financial Services Authority.

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Rose Chaudry, Squire Patton, Commercial Litigation Lawyer, Tortious Contracts Attorney
Associate

Rose Chaudry is an associate in the Litigation team with expertise in general commercial litigation. Rose qualified in September 2015 after completing her training contract with the firm.

Rose regularly acts for a diverse client base, including individuals and companies, from SMEs to PLCs. Rose has experience advising on a wide-range of matters of both a contractual and tortious nature, including breach of contract, breach of warranty, debt recovery, professional negligence and insurance.

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