October 2022 Newsletter

Please see below for a selection of key ESG stories and updates from October 2022.

FCA's consultation on SDR and investment labels

The newly-published FCA consultation on Sustainability Disclosure Requirements applies principally to asset managers, although its scope may later expand to include asset owners. Keen to address “greenwashing” among asset managers’ claims, the FCA has developed a fund labelling system and framework for fund disclosures. The former directly addresses the EU SDFR’s concern that a clear labelling system for ESG funds is lacking. The FCA proposes the labels “Sustainable Focus”, “Sustainable Improvers”, and “Sustainable Impact” to categorise funds; each term is deliberately ‘consumer-friendly’, and there should be no hierarchy between categories. The FCA will restrict the use of terms such as ‘green’ and ‘ESG’ to describe funds which fail to qualify for any of their three categories. LINK

TCFD Report Finds Steady Increase in Climate-Related Financial Disclosures Since 2017

Not only has the proportion of companies disclosing TCFD-aligned information risen steadily since 2017, the amount of information disclosed also increased year-on-year. For the TCFD 2022 Status Report, marking five years since the TCFD published its final recommendations, over 1400 TCFD reports were reviewed. The average number of recommended disclosures in each report increased from 1.4 in the 2017 fiscal year to 4.2 in the 2021 fiscal year (there are 11 recommended disclosures in total). Of eight industries covered by the report, energy companies and buildings and materials companies had the highest average disclosure levels. European companies had an average disclosure level 31 points higher than North American companies (60% and 29%, respectively). LINK

‘Green hushing’ on the rise as companies keep climate plans from scrutiny

Of 1200 companies surveyed, a quarter expressed a reluctance to publicise science-based net zero targets. The trend may stem from a desire to avoid scrutiny and greenwashing allegations. In contrast, the proportion of respondents setting science-based targets had more than tripled from the previous year to 72%. Whereas COP26 saw a race among companies to display their ESG credentials, subsequent greenwashing lawsuits and a crackdown on ESG-branded funds has led some companies to behave more cautiously. Criticism has also been levelled at the Science Based Targets initiative (SBTi) organisation itself, as companies must pay SBTi in order to become accredited. Against ESG backlash among US Republicans, companies might avoid displaying their ESG credentials for fear of becoming a target. LINK

Demand for ESG investments outstrips supply, PwC finds

A PwC study finds almost 90% of institutional investors believe asset managers should be more proactive in developing new ESG products. In contrast, only 45% of asset managers plan to launch new ESG funds. Another study from investment consultancy, Redington, finds a different set of trends, finding that 43% of asset managers were unable to provide an example from the last year where ESG factors influenced a sell decision, despite 98% of managers having an ESG policy. Morningstar, which produced its own sustainable investing survey, notes the high cost of implementation of ESG regulation is a deterrent. LINK

Typical Deficiencies Targeted in SEC Examinations of Advisers’ ESG-Related Policies, Procedures and Disclosures

The SEC draws attention to acts of “greenwashing” which violate the Investment Advisors Act of 1940. The SEC will investigate disclosures, policies, documentation and investment activity; those with the boldest ESG claims stand to receive the most scrutiny. Enforcement action on ESG is now expected, indeed, the SEC entered an order against BNY Mellon Investment Advisor, Inc. in May 2022 misstating its review procedure for ESG funds. Among disclosures, exaggerated statements are easily identified, since adherence to frameworks like the UN PRI have consistent requirements across organisations. Regarding policy, advisors should clearly define ESG and its integration into the investment process. Separately, the SEC expects the compliance department to clarify its procedure to ensure marketing materials are reviewed, sufficient ESG documentation is verified - to prevent “greenwashing”. LINK

For more information or advice on these and any other ESG matters, please get in touch.