Square Mile flagged up the lack of consultation between the regulator and financial advisers on the sustainability disclosure requirements (SDR).
The Financial Conduct Authority published a consultation paper on 25 January, proposing the introduction of a package of measures aiming at clamping down on greenwashing.
This also includes the launch of sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.
In a conference, Square Mile chief distribution officer Steve Kenny said: “We had the pleasure of speaking to the FCA on the consultation paper as part of our information gathering exercise.
“The thing that they made very clear during our discussion is that they want to set the bar high. They want the UK version of SDR to be seen as a high bar of entry, and therefore that funds meet or have a sufficient quality for the end client to be confident that it is going to be an appropriate fund.
“What I found quite interesting throughout this process is the level of consultation that’s taken place between the FCA and what is the biggest distribution place in the UK, i.e the advice market, which has been minimal to say the very least.
While Kenny welcomed the development of labels and believe that moving into an environment with labels and clear definitions is positive for the market, he thinks that a more extensive consultation with advisers would have been desirable.
“To do that without consultation to the channel that is one of the primary and largest distribution method mechanisms in the UK, was possibly not as well thought through as we would have liked,” he added.
In its consultation paper, the FCA proposed three sustainable labels. They are sustainable focus, sustainable improvers and sustainable impact.
However, Kenny warned that the latter one has been causing controversy in the market.
He said: “When we talked to the asset management community, the descriptors they’ve applied would suggest it is going to be very difficult for any fund that is invested in public markets to qualify for this label.
“There are circa 380 funds registered for sale in the UK that have got either impact, sustainable, responsible ESG, climate, etc in their title. I believe less than a third would qualify for one of the new labels.
“You’d have a 70% drift, if those funds remain as currently produced by the asset management community.”
Kenny also believes that there is going to be issues around the data used in the sustainability space.
This is because data providers focus on large and mid-caps and tend to neglect small and micro-caps.
He said: “One of the problems that has already been flagged in the EU by a number of asset managers is that it will lead them not necessarily investing down the market cap, because they won’t be able to capture the data from the companies in which they’re investing to evidence that they’re investing in the right type of companies.
“That’s going to inhibit market development, and not be good for economies.
“One of the reasons that the data vendors are able to increase their fees is the collection of the data for them to then supply to asset managers.
“Once you get out of the large and bigger mid cap funds, it necessitates manual intervention. That means hiring people to collect data, put it into a format that they can then spit out to the asset management community. You’ve got a very expensive exercise taking place.”
The new labels are also a concern for index trackers, as they may not qualify for any of them.
Square Mile head of 3D research Anna Mercer said: “Stewardship is essential to obtain the sustainable improvers label.
“That’s difficult to prove, because how do you evidence that you as an individual investor, especially as a small group or a small boutique asset manager, have been able to affect change in a company with regards to sustainability issues? How do you separate what your contribution has been from the power of collaborative institutions? All the kinds of voting and a lot of engagement activities are done at a group level, so how can you make that fund-specific? How do you break that down and how can you then show consumers that this is what you’ve achieved using their money in this fund?
“This is going to be really hard, because there’s also still the conversation going around as to what makes a meaningful engagement.
“Index trackers feel that when they can come to the table and sit down with companies, they can have the most impact from a sustainability perspective. But then how can they break that down in terms of the index tracking part of the product? It is really hard and they can’t necessarily prove that for that specific product they’ve managed to make a difference.”
