Share Action Responds to FCA CP
Share Action issues a report on the consultation paper of the Financial Conduct Authority (FCA) on sustainable disclosure standards, and proposes amendments to the three types of sustainable investment labels.
Share Action believes that the current scale of global sustainable investment funds has reached US $2.24 trillion. The sustainable disclosure policy formulated by FCA can improve industry standards, improve investor confidence and reduce the occurrence of greenwashing.
The sustainable investment label system takes retail investors as the core, but there are still some areas that need to be modified. Share Action puts forward suggestions on Sustainable Focus, Sustainable Improvers and Sustainable Impact respectively. ICMA also responses to investment labelling regime before.
Suggestions on the Label of Sustainable Focus
Share Action believes that Sustainable Focus can actively screen out sustainable assets, which is attractive to investors. The FCA set the minimum investment threshold of this category of funds in sustainable assets at 70% in the consultation paper, which also means that 30% of assets may not meet the characteristics of sustainable investment.
Share Action believes that this threshold needs to be further raised, otherwise it may not meet investors’ requirements for sustainability. Share Action recommends increasing the threshold from 70% to 85%.
At the same time, Share Action pointed out that asset management companies may have wrong choices in sustainable assets. For example, technology industry and service industry have no unsustainable impact on industry attributes, some Sustainable Focus funds may prefer to allocate in such industries to meet the minimum threshold requirements.
Share Action believes that this has led the fund to avoid the problems rather than to solve them. FCA should formulate relevant rules and make certain restrictions on the investment choices.
Suggestions on the Label of Sustainable Improvers
Share Action believes that sustainable improvers emphasize the influence of investors. FCA should formulate a regulatory plan for the voting process of fund companies in order to improve the effectiveness of decision-making. An appropriate voting process should include:
- Definition of process: define the objectives that investors want to achieve;
- Voting scheme: describe the communication and voting methods between investors and the board of directors;
- Voting supervision: clarify the “operation” and “deadline” stages of the process;
- Impact process: measure the impact of voting results on investee companies;
In addition, Share Action highlighted the difficulties faced by bond investors in stewardship. Bond investors lack the way to influence the company, but hope to use sustainable investment to influence the company like shareholders. Share Action recommends that FCA develop relevant guidelines for bond investors.
Suggestions on the Label of Sustainable Impact
Share Action believes that Sustainable Impact pays attention to the impact of investment, but overemphasizes the important role of investors in asset selection, and the actual influence should come from the investee companies. FCA should balance the weight of investor impact and investee impact in this label, otherwise the company that should have actual impact will be difficult to play its role, and this may lead to the failure in Sustainable Impact label.
FCA emphasizes the additional impact of Sustainable Impact on the investee company. For fund investors, the measurement of additional impact is relatively difficult, and the definition of impact investment by GIIN (Global Impact Investment Network) does not include additional impact. Share Action recommends that FCA revise the statement of additional impact to make clearer statements.
At present, the assets involved in Sustainable Impact are more related to the private market (i.e., the investment market dominated by institutional investors), and many assets related to the public market are divided into Sustainable Focus. Share Action recommends that FCA define the private market and the public market in Sustainable Impact label.