MFA Submits Response to FCA’s Consultation on SDR and Investment Labels

On January 25, 2023, MFA submitted a written response to the Financial Conduct Authority’s (FCA) consultation paper on Sustainability Disclosure Requirements (SDR) and investment labels. MFA expresses its support for the FCA’s objectives but calls for greater clarity around how the rules will apply.

MFA supports the FCA’s efforts to build greater transparency, consistency, and trust in the market for sustainable instruments, products, and the supporting ecosystem. Specifically, MFA supports the FCA’s objectives of reducing greenwashing, increasing standardization of sustainability information, and empowering consumers to make informed decisions. However, given alternative asset managers employ a wide spectrum of investment strategies and take various approaches to ESG issues, MFA calls on the FCA to provide greater flexibility and clarity on how the rules will be applied.

MFA agrees with the FCA’s view that it is important to ensure that the proposed SDR rules strive to ensure coherence with other regimes, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) and proposals by the Securities and Exchange Commission (SEC) in the US. Given that the two regimes are still being developed, MFA proposes delaying the implementation of the proposals by at least twelve months. Further detail is available below.

MFA commends the FCA’s approach to labeling but calls for providing greater guidance on how the proposed criteria for each category should be met. MFA recommends creating a fourth category for products with sustainable features that do not cleanly fit within the first three categories. From the letter:

“MFA supports the FCA’s proposal to not prescribe specific standards that need to be met to meet the scope of each type of label, as this would allow for flexibility in light of the different types of products/services that may be offered.”

“MFA recommends that the FCA considers providing a fourth category to cover products that do provide sustainability features (beyond foundational ESG integration strategies) but do not qualify for the three proposed sustainable investment labels. This would ensure that investors are able to identify such types of sustainability-related products to meet their own needs.”

MFA highlights that the FCA should provide further guidance on how the proposed SDR rules will interact with the requirements from other jurisdictions. From the letter:

“In our view, given that UK investors invest in products from US, EU as well as UK manufacturers, UK investors will also benefit greatly from further clarity on how the proposed SDR rules interact with the requirements under the SFDR as well as the SEC proposals. Effective guidance in this respect would enable firms to leverage their existing disclosures in developing SDR-compliant disclosures and ultimately minimise administrative and cost burdens for the benefit of UK investors.”

MFA supports the FCA’s effort to combat greenwashing and agrees the naming and marketing of products should be consistent with the sustainability profile of such products. However, MFA emphasizes the need for greater clarity on how the rules apply. From the letter:

“The proposed “anti-greenwashing” rule will help ensure that sustainability claims in the UK market are substantiated. MFA agrees that the naming and marketing of products should be consistent with the sustainability profile of such products.”

“MFA requests the FCA to clarify: (i) how the FCA intends to detect greenwashing or receive claims of greenwashing; (ii) what definition or criteria of greenwashing the FCA will use to assess a potential instance of greenwashing; (iii) how the concept of “proportionality” will be applied; and (iv) what processes the FCA will take to engage with a firm and potentially escalate with enforcement action.”

MFA welcomes the FCA’s recognition of the potential role short selling can play in advancing sustainable outcomes. From the letter:

“MFA greatly welcomes the FCA’s acknowledgement of the role that short-selling can play in contributing to positive sustainability outcomes. A recent report published by MFA, in conjunction with Copenhagen Economics, provides quantitative evidence in support of this position. In addition, MFA supports the FCA’s proposal to not set specific parameters for the use of short-selling in this context, given that short-selling can be used to contribute towards sustainability outcomes in various manners.”