The Financial Conduct Authority is inviting views on potential criteria to classify and label investment products, to help consumers put environmental, social and governance matters “at the heart of their investment decisions”.  

In a new Discussion Paper published on Wednesday to coincide with COP26 Finance Day, the FCA wants to hear from industry on possible ESG product labels to help investors navigate the market. A formal consultation on new proposals for asset managers is planned for the second quarter of next year, but the FCA is also exploring how to introduce requirements for advisers. 

The news comes as the chancellor announces the UK will become a ‘Net Zero Aligned Financial Centre’, making it mandatory for firms to publish a plan for how they will transition to net zero.

 

The FCA is also gathering feedback on supporting entity-level and product-level disclosures and said it will leverage existing initiatives in this area, for coherence with market practice and other regulation.  

 

In its most recent Financial Lives survey, the FCA found that 80% of respondents wanted their money to ‘do some good’ while also providing a financial return, 71% wanted to ‘invest in a way that is protecting the environment’ and 71% said they would not put their money into ‘investments which are unethical’.  

 

The FCA is of the view that consumers need clear standards and information if this demand is to be satisfied, and to be able to trust firms to deliver on their promises. It asks among others whether labels should only apply to products that make a sustainability claim or the entire range of products, and whether there should be entry-level criteria. 

 

Potential approach to sustainable product classification and labelling system

 

Chief executive Nikhil Rathi said innovation is vital for a more sustainable future, but that this requires “consistent, trusted standards” to give investors confidence. “The strategy we have published today puts these standards front and centre, supported by supervision and enforcement where firms fail to meet them,” he said. 

 

The Discussion Paper, which closes to responses on 7 January 2022, forms part of the FCA’s new ESG Strategy, also released on Wednesday. With the regulator’s greater focus on climate risk, it has also said it will expand its own ESG resources and capabilities. 

 

The desire to create ESG labels arises not just from consumer demand, but through the government’s recently confirmed plan to create Sustainability Disclosure Requirements for companies. The FCA will need to implement this alongside other regulators and government departments. The Treasury is currently leading a cross-Whitehall/cross-regulator working group to develop policy recommendations and legislative proposals, the FCA noted.  

 

   

The EU already has in place Sustainable Finance Disclosure Regulations which many UK firms are subject to. In its paper, the FCA asks in how far the UK’s SDR should reflect the EU’s SFDR and how overseas providers should be treated, including in light of the planned Overseas Funds Regime.  

 

Speaking at COP26, Rathi will also announce that the FCA will, by the end of this year, confirm final rules for Taskforce on Climate-related Financial Disclosures alignment for a wider scope of listed issuers, asset managers, life insurers and pension providers. The FCA previously announced that TCFD disclosures will become mandatory for these firms, in line with the Treasury’s roadmap. 

 

   

Do you welcome the introduction of sustainability product labels by the FCA?