The FCA is doing good work , establishing a standard way to display green funds so that people know what they are buying with confidence. Their thinking so far is outlined in a discussion paper DP 21-4.
The paper is about two things, firstly- implementing the Sustainability Disclosure Requirements (SDR) and secondly creating sustainable investment labels. To use simpler language – we need to know what’s in the packet and what’s on the packet.
If we know a fund does exactly what it says on the packet, the FCA’s work will be done.
In this blog ‘m conflating two quite different concepts of “green” . But Professor Green (Stephen Manderson) ‘s early success was based on the integrity of the green he sold, so there is some sense in the pun.
We learn from the FCA DP that there are more than 700 funds on offer in the UK that profess to be green (in the sustainability sense) and the FCA wants us to be able to make sense of them , by analyzing their strength and quality , much as Professor Green would have for his customers.
The means of disclosing this analysis looks like happening at two levels (layers)
This shows that the FCA is learning, perhaps this is the way that other disclosures will go in the future (like value for money). And what’s going to be on show is a distillation of the most important metrics out there.
I know this sounds lazy, but I am taking the FCA at its word that all this stuff matters. You’ll notice that along with corporate and asset manager disclosures, there’s a new thing “investment product disclosures” with “investment product labels”. These are going to be assed against the UK green “taxonomy” – that’s all the greenness out there that’s strong enough to be worth
smoking comparing with.
“Taxonomy” is a branch of science concerned with classification, the green taxonomy is the classification of all the shades of green, including those shades that are so washed out that they aren’t worth the smoke.
So how does this taxonomy work – what are the labels?
The FCA has worked out a kind of progress from the not even trying to the “we’re making an impact” type of fund, “hemp to skunk” if you follow the analogy.
How does this help?
Clearly it’s going to be a lot more easy to work out what strength of green you’ve got in your portfolio using this “hemp to skunk” scale. You can see that I’ve got about as much chance of getting a job in the FCA as Professor Green himself but if you saw “not promoted” as your hemp and your “impact” as your skunk – you would have a good frame of reference (unless you didn’t smoke dope – I don’t).
By knowing what you are buying , you can dial up or down the degree to which you are “investing for purpose”. There are investments which offer no return on your money , there sole purpose being to make a positive impact on societal problems (typically reducing climate change).At the other extreme, people can choose to exploit the profits being made by stocks being divested elsewhere.
This labelling is helpful but there needs to be monitoring of the fund, to ensure it is being managed as advertised. I am pleased to see the FCA considering third parties (such as the British Standards Institute) being involved in the verification process.
This is precisely the kind of regulation I want, regulation that anticipates problems and provides practical assurance to those wishing to make their money matter that they can get value for their money by getting what they pay for.
This would be regulation that allows consumers to participate in ESG with confidence.