It is now well accepted that financial services and markets have an important role to play if we are to transition to a more sustainable economy. But, as we highlighted in our report Time for Action: Greening the Financial System, Time for Action – Greening the Financial System FIC FPF Report there is a long way to go before the right financial behaviours are mainstreamed into financial markets.
A priority is ensuring that financial institutions are transparent and disclose how their activities are aligned with climate goals. This is important so that investors and others such as pension fund trustees can make effective decisions and to reduce the risk of ‘greenwashing’. If this is to happen, a robust and meaningful classification system (a ‘taxonomy’) is needed along with rules on how financial institutions should disclose degrees of compliance.
With this in mind, the Financial Conduct Authority has issued a Discussion Paper DP21-4 Sustainability Disclosure Requirements (SDR) and Investment Labels.
The Financial Inclusion Centre has submitted its views on DP21-4. We argue that the current set of statutory objectives given to financial regulators, including the FCA, do not reflect the scale of the challenge if we are to align financial market behaviours with climate and other public policy goals.
On the specific proposals relating to disclosure and transparency contained in DP21-4, we supported some of the FCA’s initial proposals. The FCA wants to introduce a tiered approach to disclosing information. This is appropriate as different external users of relevant data and information (such as investors, pension funds, civil society) will need to have access to (or be interested in) different levels of component data.
But, we have serious concerns about the classification system proposed by the FCA. The classification system proposed is not robust and could result in confusion. In particular, the low level criteria that financial institutions would have to meet to be allowed to market and promote their funds and products as ‘Responsible’ and ‘Sustainable’ could lead to greenwashing, misselling, misrepresentation, and investors inadvertently making poor financial decisions.
We are also very concerned about the lack of detail on how the FCA will supervise compliance with its rules and how claims made by financial institutions are to be independently audited to ensure that any label or rating system is not built on misleading foundations.
Our submission can be found here: Financial Inclusion Centre submission to FCA dp21-4 final