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UK’s ‘SFDR equivalent’ is incoming as industry racks up ESG failures

Neill Blanks, research director at MainStreet Partners, specialists in ESG advisory and portfolio analytics since 2008, reacts to the FCA’s letter on ESG funds, published yesterday (19 July 2021).

  • What does this mean for the industry?

For the UK investment industry this is a positive sign. It is reassuring that the FCA is not only carrying
out more in-depth checks to identify greenwashing, but also publicly declaring its intentions. It is
setting the bar higher and will hopefully make asset managers give more thought prior to requesting
authorisation rather than simply trying to get products to market as quickly as possible.

  • How do they build considerations of this into the product design phase?

The FCA is not actually declaring anything earth shatteringly new – this is common sense. It is
effectively a telling off by the teacher for submitting some below par homework – grade
“improvement needed”. Product design is not just about the sales team coming up with trendy
themes, but requires a well thought out, structured process to ensure the strategy is clear in what it
is trying to achieve from the outset, and even more importantly, that it can provide the necessary
evidence as validation.

  • What challenges do you see in asset managers living up to the FCA’s standards?

The FCA is quite right in that the asset management industry is experiencing a period of rapid change
and it feels like some asset managers are scrambling to keep up, while others are trying to be truly
innovative. The larger houses have an advantage in terms of budget and resource, and I worry that
smaller asset managers are going to struggle unless they are able to stand out from the crowd. It
certainly does not feel like a level playing field, although the availability, consistency and accuracy of
ESG data is a challenge across the industry.

  • What can financial professionals look for to feel confident in ESG funds?

Exactly what the FCA says, clear and consistent information and evidence to substantiate objectives.

  • Should the FCA have acted sooner? What do you think has prompted them to act now?

Even though the UK has not onshored the EU’s Sustainable Financial Disclosure Regulation (SFDR), it
is clear the FCA is working hard to establish equivalent rules for the UK asset management industry.
While that may still be work in progress, they obviously felt the need to provide more guidance in
the interim given the growth of the market and the associated influx of fund
authorisations/rebrandings.

  • Is there anything in these guiding principles which is not complementary or aligned with SFDR?

Very much complementary. If anything, it touches on some more specific areas e.g. with regards to
the engagement and the stewardship policy of a fund. Most asset managers rely on a single groupwide stewardship policy and fund-specific reporting is not always available. At a time when every
asset manager seems to be claiming they actively engage with companies in their portfolios, this is a
key area to help identify greenwashing.

  • Should the UK have simply complied with SFDR to make it simpler and to have one framework
    that everyone understands?

In an ideal world, yes. However, SFDR is by no means perfect and the FCA is obviously working to
establish its own set of rules. Hopefully these will at least rhyme with the existing EU regulations to
avoid unnecessary confusion and red tape.

  • Do you think these guiding principles go far enough/will make a difference or is full regulation
    needed?

As indicated, the UK’s equivalent of SFDR is coming and if anything, it’s reassuring that regulations
haven’t just been rushed through but the FCA is taking into account both existing frameworks as well
as “prospective future disclosure rules”.

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