January 2023
COMMENT: CONSULTATION PAPER CP22/20 – SUSTAINABILITY DISCLOSURE REQUIREMENTS AND INVESTMENT LABELS
January 25, 2023 SDR and labels policy Financial Conduct Authority 12 Endeavour Square London E20 1JN submitted via cp22-20@fca.org.uk
To whom it may concern , The team at Climate & Company is honoured to hereby provide technical inputs on a subset of the questions that were part of the CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels. The experts at Climate & Company who drafted this response collectively have several decades of experience working with carbon/climate finance and environmental reporting . More specifically, Climate & Company conducted two studies for the European Commission to test the applicability of draft EU Ecolabel criteria to 101 equity funds. 1 According to a survey conducted by the Climate Bonds Initiative (CBI), (retail) investors have an interest in investing in the transition and shift capital into more climate friendly investments. However, the willingness to incorporate these preferences into investment strategies also increases information costs for them – in particular for complex topics, such as transition finance. A meaningful way to reduce these information costs and steer financial flows toward sustainable activities is through (eco)labels for financial products, as they reduce the complexity of the underlying information. Evidence shows that sustainable investment labels increase the inflows compared to their less sustainable counterparts. 2 While we support the introduction of sustainable investment labels, especially with a focus on economic activities in transition, and hope to see a swift adoption and implementation, we would like to provide several recommendations for improvement. This response builds on research originating from the ClimLabels project, financed by the German Ministry of Education and Research (BMBF). The project analyses transition labels in climate finance. Our technical input therefore focuses on the "Sustainable Improvers" label, its qualifying criteria (in particular Question 9), and how (retail) investment can support Paris-aligned transition pathways and the decarbonisation of high-emitting sectors. To date, most efforts to align financial flows with the trajectory towards lower greenhouse gas emissions and the goals of the Paris Agreement, have focused on “dark green” sectors and economic activities. But there is also the urgent need to create and finance transition pathways of currently high-emitting sectors, if low-carbon technologies are available.
In 2020, Climate & Company applied EU Ecolabel draft criteria v2 to 101 equity funds marketed as green, concluding that 3-7 funds would comply with the criteria. The study was one of the front-runners regarding EU Taxonomy application at financial portfolio level and provided valuable insights how a EU Taxonomy evaluation can be done. In a second analysis, C&C supported the EU’s Joint Research Centre in further developing the criteria. Parts of the analysis can be found in the technical report v4. 2 Becker, M. G., Martin, F., Walter, A. (2022). The power of ESG transparency: sustainability labels on mutual funds and individual investors. Finance Research letters, 47, Part B, 102708 (link). 1
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