More consumer education needed to ensure SDR success

Leading investment fund data and technology company FE fundinfo has called for the FCA to provide a programme of education to ensure consumers fully understand the classifications and labels proposed under the UK’s Sustainable Disclosure Requirements (SDR).

Responding to the FCA’s ‘Discussion Paper on Sustainable Disclosure Requirements and Investment Labels in the UK’, FE fundinfo’s Regulations Manager Mikkel Bates warned that many consumers may not fully understand what terms such as ‘transitioning’ and ‘aligned’ funds mean without further guidance.

Mikkel Bates said:

“The SDR seeks to build on the important work that organisations such as The Investment Association (IA) and The Investing and Saving Alliance (TISA) have undertaken to clarify the terminology surrounding ESG investing, but without further guidance for consumers, there is a risk that some funds could be shunned in error by investors who are seeking to avoid, in principle, those practices or sectors on which the managers seek to exert influence to change, through robust engagement policies.

“Transitioning funds are definitely the stand-out in terms of both labelling and the description of their activities. It is important that consumers are aware that a low allocation to taxonomy-aligned activities is not necessarily an indication of unsustainable investment, especially as many holdings in a transitioning fund would naturally be shunned by many sustainable investors. They need to be made aware of the intention to drive the transition (including the process, how success is measured and the triggers – both positive and negative – for disinvestment).”

A potential solution for consumers could be a programme which builds on the IA’s Responsible Investment Framework, which was designed to get the industry using the same language for the same concepts. A consumer-facing ‘factsheet’ produced by the FCA shared by advisers and fund groups would ensure consumers are able to understand the terminology being used.

While the discussion paper also seeks to provide consumers with greater ESG disclosures from investment funds, FE fundinfo has also warned that any additional investor information produced through the SDR must complement existing pre-sale documents.

Mikkel Bates added:

“We are concerned about the number of different documents retail investors are given pre-sale, especially if the intention is to add an ESG factsheet to the list. The more documents that are added to the KIID/KID, suitability letter, marketing factsheet and other pre-sale information, the less likely consumers are to read any of them.

“We would prefer the disclosures to form the basis of a new type of disclosure document for all funds, to include much of the information on the current KIID/KID. It is also important for consumers to be able to compare the key disclosures from different funds.”

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