Sustainable Products: How confident are you in your claims?

Following on from recent climate-related speeches at the Green Horizon Summit earlier in November, the FCA’s Director of Strategy turned the focus to sustainable investments this week. Speaking as part of SRI Services and Partners ‘Good Money Week’ panel discussion, Richard Monks set out some interesting points, as noted below:

1. Product design and development:

Whilst encouraging the development of new sustainable products, highlighting the need for ongoing evolution to meet new customer preferences, suppliers will need to ensure products are clear and differences are suitably highlighted. Foremost in this is the need to ensure that green credentials are not over-exaggerated to create greenwashing.

FourthLine considerations for firms:

  • How are green credentials considered in the product development process – e.g. what makes the product ‘green’?
  • Who challenges achievability of the green status of a product at development and initiation stage and does your organisation have the capability and credentials to perform this independently?
  • How frequently are the green objectives of the product assessed and validated?
  • Who performs ongoing monitoring of the objectives (i.e. independent assurance)?
  • Where and how frequently will the achievement or failure to achieve these objectives be reported?

2. Completeness and interpretation of disclosures:

The FCA found that in some cases “products’ names do not seem to be well aligned with their objectives, investment strategies, asset composition or exposures…creating expectations among consumers that are not met”.

The FCA used the example of seemingly environmentally unfriendly mining stocks being included in portfolios as they include clear sustainability goals, commitments for withdrawal from coal mining and emission reduction plans. Without adequate disclosure of this information, on the face of it, the inclusion would look less than green.

The FCA also noted they are performing their own customer testing around customer comprehension of ESG terms, which may yet trigger further rules.

FourthLine considerations for firms:

  • What customer engagement do you have prior to product launch and does this go as far as using customer testing or pilots to ensure sustainability elements are benchmarked against their expectations?
  • Has language and information used in disclosures been customer road-tested and does it allow comprehension and ease of understanding of why the product is designed and marketed as green?

3. Targets, metrics and data:

Metrics and targets form one of the four pillars of the Taskforce for Climate-related Financial Disclosures’ (TCFD) framework. The FCA have been clear in stating that a “firm should assure ESG data quality, understand their source and derivation, and articulate clearly and accessibly how it is used.”

FourthLine considerations for firms:

  • Where impacts need to be reported, does the firm understand how to assess and measure these?
  • Has the firm identified and flagged the relevant data, both internal and external, it will need to evidence performance against sustainability objectives?
  • What assurance does it have around the accuracy, completeness, comparability, and timeliness of this data?
  • Is data all obtainable? For example, do existing supplier agreements include requirements to provide data needed from them in a timely manner?
  • Will you seek verification? If so, what level and who will provide it?

Climate risk and sustainability continue to be hot areas of regulation and compliance. For further insights on getting started on implementing your climate risk framework, please download our insights deck here>.

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Topics: Flexible, Financial Climate risk

November 25, 2020
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Ross Molyneux
Written by Ross Molyneux

Ross specialises in risk management and regulation. He has worked extensively across non-financial and financial risk management engagements in his time in consulting in both the UK and New Zealand.