ClientEarth response to FCA discussion paper on Sustainability Disclosure Requirements and Investment Labels (DP21/4)

The UK’s Financial Conduct Authority (FCA) issued a discussion paper (DP21/4) for consultation in November 2021 covering the development of an investment product labelling regime and new sustainability disclosure requirements (SDR) for the UK market, which build on the FCA’s introduction of climate-related disclosure requirements to cover sustainability issues beyond climate-change.

The FCA’s proposals would create a labelling system for investment products that are marketed as “Sustainable”, “Responsible” or “Not promoted as sustainable”, with sub-categories of “Sustainable” funds, including a category designed to accommodate “Impact” funds. The new SDR requirements would require asset managers and certain FCA-regulated asset owners to report on their sustainability risks, opportunities and impacts, as part of wider UK Government plans to roll out SDR reporting across the economy.

Overall, ClientEarth welcomes the expansion of sustainability disclosure requirements for FCA-regulated firms and the introduction of investment product labels. In our response we outline our concerns with the proposed regime, which we believe must be addressed in order to ensure that it is robust, understandable to consumers and does not facilitate or formalise greenwashing, as follows:

1. Product labels must not facilitate or formalise greenwashing.
2. The labels must be clearly understandable to investors and consumers.
3. SDR disclosures must capture “double materiality”, meaning both the financial risks posed to investment products by social and environmental factors and the impact of investment products and the companies they invest in on society and the environment.
4. The SDR and labelling regime must be underpinned by effective monitoring and enforcement from the FCA.