FCA director of ESG Sacha Sadan (pictured) has defended the regulator’s proposed fund labelling scheme despite fears over the nuances of the ‘sustainable improvers’ category.
During a panel discussion at Morningstar’s Investment Conference in London on Tuesday (4 July), Morningstar global director of sustainability research and ESG Clarity Committee member Hortense Bioy raised concerns over the rules on funds being categorised as improvers.
According to the regulator, the tag is given to products with an objective to “deliver measurable improvements in the sustainability profile of assets over time”.
While the assets may not be currently environmentally or socially sustainable, they must have the potential to become more sustainable over time.
Bioy suggested the category could prove problematic, however, saying there may be “some room for greenwashing” due to no specifics being required on the overall amount of a portfolio which must be tied to improving sustainability. She questioned whether this would be a small portion of a strategy or the entirety of the fund.
‘Ask an impact fund to show it has done some impact’
Bioy also raised concerns over the requirements for sustainable funds to provide measurable evidence of the impact it has had, adding: “There has been some criticism of the impact label, the way it is described is not going to be very helpful because you are going to end up with a very narrow universe of funds because you evidence additionality.”
Sadan hit back at this, however, saying: “Shock horror, you ask an impact fund to show it has done some impact.”
He added: “If you are going to say it is causing impact, you should be able to measure it. Come on, you have to do your job, we have to do our jobs and they have to do their jobs.
“You don’t have to have a [sustainability] label, but if you want to have a label and you want to use this stuff, you have to explain what you’re going to do… income funds have a yield target, if you’re going to have a non-financial sustainability label then you need to have a non-financial metric.”
Sadan also said the FCA had built the proposals through the lens of a consumer.
He believes greater transparency is needed with regards to the assets featured in ESG funds, especially when explaining their suitability within a sustainable portfolio to a consumer.
“If you want to get to a consumer, you want them to understand it, get it into two pages, speak their language, and tell them why an oil and gas firm is in a green fund,” Sadan said.
“It might have a good reason to be in a green fund, that you are improving it, but make sure you are explaining it in the first two pages.”
Following the initial consultation on Sustainability Disclosure Requirements back in January, the UK Sustainable Investment and Finance Association (UKSIF) also queried how the actual ‘improvement’ of a fund’s holdings might be quantified.
At the time, UKSIF said: “In the short term, we see the lack of consistent, clear guidance and metrics outlined in order to measure the performance and characteristics of funds in this category, specifically the extent to which they are ‘improving’ and transitioning, as a real issue.”
This article was originally published in ESG Clarity sister publication Portfolio Adviser.