January 2023 Newsletter

We hope the New Year has got off to a good start for you. Please see below for January’s top ESG news stories.

A dive into the FCA’s proposed Sustainability Disclosure Requirements and investment labels

The newly released Sustainability Disclosurget in touche Requirements (SDR) consultation paper from the Financial Conduct Authority (FCA) addresses greenwashing and transparency concerns. It proposes the introduction of sustainable investment labels, disclosure requirements, an anti-greenwashing rule and restrictions on using sustainability-linked terms. The SDR aim to inform investors and consumers on sustainability best practices, thus fulfilling a tenet in the government’s Greening Finance Roadmap. Its sustainable investment labels are: sustainable focus, sustainable improvers, and sustainable impact. The FCA envisages no hierarchy among the labels, and only labelled funds are allowed to use terms such as sustainable and impact in product naming and marketing. Firms which don’t use the labelling system are still obliged to produce detailed sustainability disclosures. The SDR seek coherence with the European Commission’s SFDR and the SEC’s approach in the US where possible. LINK

Response to FCA's SDR consultation

In response to the FCA’s proposed Sustainability Disclosure Requirements (SDR), reported on above, stakeholders raised several queries. The scope of the SDR may be unclear, for example, whether a non-UK product managed by a UK firm falls under scope. Moreover, there were concerns that the labelling system is geared toward single fund managers and funds, potentially at the expense of multi-asset and fund of funds. Consideration of “un-labelled” funds is also necessary, since it would be unfair to severely restrict the language such fund managers can use in marketing materials when describing sustainability-related activities and efforts to consumers. There is some ambiguity surrounding the requirements for each label. For the sustainable focus label, clarity is needed over the 70% of assets which must meet a credible standard of environmental and/or social sustainability; it is unclear as to whether assets such as cash, derivatives and short positions should be excluded from calculations. The sustainable improvers label is lacking in credible criteria to measure these funds’ “transition potential”, and more clarity is needed on the sustainable improvers KPIs. Moreover, stewardship being a key criterion for sustainable improvers may prove problematic for smaller managers. LINK

PRI Updates Responsible Investment Reporting Framework for Investors

The Principles for Responsible Investment (PRI) organisation released its updated Reporting Framework in January. The PRI reporting process has been paused since 2021 to allow for the framework, applicable to its investor and asset-owner signatories, to be updated. Following the release of the new framework, the reporting cycle will resume in May 2023. Last updated in 2012, the new framework seeks to improve clarity through updated terminology and less ambiguity in the phrasing of questions. Some sections of the framework have been restructured for better alignment with other sustainability reporting frameworks, such as the TCFN, TNFD and ISSB. In accordance with the PRI’s 2021-2024 strategic plan, the new framework also incorporates voluntary indicators focussed on emerging theme including human rights. For more information on recent changes to the PRI Reporting Framework, see our update here or get in touch. LINK

Red States Sue to Stop Biden Administration Rule Allowing ESG Investing in $12 Trillion of Retirement Plans

The Attorneys General of 25 Republican-leaning states have launched a lawsuit against the Biden administration, aimed at preventing a new Department of Labour (DOL) law from being implemented. The law would allow for climate and ESG factors to be considered in private employer-sponsored retirement plans (ERISA). The AGs oppose the new law because it “undermines key protections for retirement savings of 152 million workers […] in the name of promoting environmental, social, and governance (“ESG”) factors in investing”. The DOL announced its final ruling in 2022 to allow fund managers of ERISA plans to include ESG considerations in the investment process and allowed for the consideration of climate and ESG factors by fiduciaries when exercising shareholder rights, for example, in proxy voting. LINK

PRI to launch collaborative nature stewardship initiative

The PRI plans to launch a stewardship initiative on nature. A job advertisement for a head of stewardship for nature role states that the initiative will involve forming groups from PRI signatories to “use engagement and other stewardship tools” to influence companies across a range of sectors. Paul Chandler, director of stewardship at the PRI, confirmed “the PRI expects to recruit a signatory advisory committee and a technical advisory group in the coming months”. The PRI plans follow a year of increased nature-focussed engagements. The Nature Action 100 was officially formed at COP15, although Chandler said of the PRI’s future initiative: “[the initiative] will be additive to existing effort across the industry and will avoid duplication of existing work, such as that of Nature Action 100”. LINK

We hope this is informative. If you require further insight, including on the recent changes to the PRI Reporting Framework, please get in touch.