Success of the Financial Conduct Authority's sustainability disclosure rules will ultimately be determined by consumer choice – something that has yet to materialise, says Carol Thomas, head of sustainability and responsible investments at the Investment Association.
The FCA's naming and marketing rules and its new sustainable fund labels are due to take effect an the end of this year, but so far a mere 10 funds have had a label authorised.
Without attaining one of four sustainability labels funds will no longer be able to use certain terms, such as sustainable and impact in their names. They can still use the terms ESG and green but only if they meet certain criteria.
Thomas says the IA welcomes the rules and while it is expecting a lag in labels coming to market, this would pick up over the course of 2025.
In a Q&A with FT Adviser In Focus she explains what member feedback has taught the IA about the implementation of the new rules and how they might be applied to passive funds and bonds.
FTA: You had some misgivings when the FCA's SDR rules were being developed – are you happy with the final rules?
CT: The publication of the FCA’s SDR and investment labelling regime brought welcome clarity to investment managers.
We were pleased the regulator listened to industry feedback and took a broader approach on several key issues, including accommodating mixed asset funds within the labels, greater flexibility on marketing rules and a commitment to work towards international interoperability of sustainable finance standards.
FTA: What are the main issues your members are facing with implementing SDR and the labelling regime?
CT: The implementation of SDR and investment label requirements is novel, both for industry and the FCA.
An application to the FCA has to clearly set out how the fund is complying with the SDR requirements, either for a label or to meet the naming and marketing requirements.
Over the past few months, that application process has proven very iterative, with more amendments to applications than is the norm.
While the go-live date of July 31 2024 for the labels is voluntary, the December 2 2024 deadline (or extended deadline of April 2 2025) for meeting the naming and marketing rules is not – and if a fund is not availing of one of the four labels, it can’t use the words ‘sustainability’, ‘sustainable’, or ‘impact’ (or variations of those terms) in fund names.
If a firm decides it won’t adopt a label and has to change the fund name, it has compressed the timeframe to prepare for the deadline, especially given fund governance processes and minimum investor notification timelines.
FTA: Based on feedback from your members, what share of the market might labelled funds take over and how soon?
CT: A survey of IA member firms in March 2024, between them running around 3,200 UK authorised and recognised funds, found that two-fifths of in-scope firms intend to apply a sustainability label to at least one of their UK-domiciled funds, with the majority doing so by the end of 2024.
