For those who care about environmental, social and governance considerations, watching the glacial progress towards standardised ESG disclosures has been frustrating.
There are more working groups, task forces, frameworks and roadmaps than you could shake a stick at (I have never tried shaking a stick at a working group, and it would probably get me fired, but you get the idea).
Dare I suggest that we might even spare some sympathy for the Financial Conduct Authority, which has the job of turning all the reams of recommendations and principles by such authorities as the Task Force on Climate-Related Financial Disclosures, International Sustainability Standards Board, International Organisation of Securities Commissions, and a score of others into a disclosure regime that is both straightforward and nuanced, stringent but flexible, endorsed by experts yet clear to consumers?
It is a tough job, but a hugely important one. What is at stake is the credibility of ESG itself. Is it a movement, or a marketing ploy?
Our own research suggests that advisers are not cynical about the notion of ESG itself (four-fifths think investments should make a positive difference as well as a financial return), but they are sceptical about ESG claims, and if the FCA’s ‘Dear Chair’ letter last year is anything to go by, they are right to be.
A proper disclosure regime offers the chance for asset managers to show that ESG is more than marketing. It is also crucial for advisers, who the FCA will require to take clients’ ESG preferences into account when selecting investments. Just as regulation governing the food we eat reassures us that it is safe, fresh and contains what it says on the packet, a good sustainability disclosure regime could instil confidence and aid choice while stopping greenwashers in their tracks.
Challenges
In some areas, the FCA has made a good start. The idea of a three-tier disclosure with a clear product label, a consumer-facing disclosure and a more detailed disclosure for institutions is a good one.
However, there are five big challenges for the FCA to navigate, where the early signs are not so promising.
To begin with, the S of ESG was largely ignored in the FCA’s recent discussion paper. Our research shows it is nearly as important to investors as the E, especially issues such as human rights and working conditions. Yet it has merged into the general concept of “wider sustainability topics beyond climate change”.
To the person in the street, 'sustainable' means green. The FCA needs to acknowledge this by making sure its disclosure regime clearly differentiates between environmental sustainability and positive social objectives (a product could, of course, focus on both).
Another area where the sweet smell of fudge can be detected is in the proposed ‘responsible’ and ‘transitioning’ product categories. The UK Sustainable Investment and Finance Association has already raised concerns that a responsible label – widely understood to be synonymous with ESG integration – could over-promise to investors.
