A Sustainable Future: Sacha Sadan, FCA Director of ESG, on the SDR Framework

 

How is the UK's Financial Conduct Authority (FCA) driving the next evolution of sustainability regulation? Listen to Jason Mitchell discuss with Sacha Sadan, FCA Director of ESG, what the FCA’s new SDR framework means for investors; how it aims to provide anti-greenwashing protections; and why we need to work towards greater harmonisation across the multitude of global sustainability standards.

Recording date: 18 November 2022

Sacha Sadan

Sacha Sadan is the Director of ESG at the UK Financial Conduct Authority (FCA) where he oversees ESG across the wide spectrum of regulatory activities and reports to the CEO. Prior to the FCA, Sacha was Director of Investment Stewardship and on the board at Legal and General Investment Management where he had responsibility for investment stewardship, collaborating with other investors, governments and regulators. Sacha was previously a UK equity manager at Gartmore where he co-managed a range of UK equity hedge, retail and institutional funds.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, head of Responsible Investment Research at Man Group. You're listening to a Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi everyone. Welcome back to the podcast, and I hope everyone is staying well. Over the last several years, regulation has emerged as one of the predominant themes in sustainable investing. But while each of these regulatory regimes is working towards a common goal of providing protections against greenwashing, the approaches themselves sometimes differ dramatically when it comes to disclosure labelling, and of course, enforcement. Indeed the old dictum. Do what you say and say what you do sounds pretty straightforward, but it's increasingly clear that there's a lot of nuance and even disagreement in what the actual doing should look like. Some take a more principles-based approach, others a more prescriptive one, some prioritize directing capital flows to support the climate transition.

Others stick to their core mandate to provide consumer protection. And here's where the FCA's long-awaited sustainable disclosure requirements or SDR comes in. It focuses on rebuilding trust with the concern that greenwashing may have already eroded credibility in sustainable investing through five key areas, sustainable investment labels, consumer-facing disclosures, naming and marketing rules, requirements for distributors, and a general antique greenwashing rule. It's why it's great to have Sacha Sadan from the UK Financial Conduct Authority or FCA on the podcast. Sacha brings a clear-eyed perspective about what sustainability regulation needs to accomplish. We talk about what the FCAs new SDR framework means for investors, including alternatives, how it aims to provide anti-greenwashing protections, and why we need to work towards greater harmonization across the multitude of global disclosure standards. Sacha Sadan is the director of ESG at the FCA where he oversees ESG across the wide spectrum of regulatory activities and reports to the CEO.

Prior to the FCA, Sacha was the director of investment stewardship and on the board at Legal & General Investment Management. Sacha had responsibility for investment stewardship including ESG areas, collaborating with other investors, as well as governments and regulators. Sacha was previously a UK equity manager at Gartmore, where he co-managed a range of UK equity hedge retail and institutional funds. And last, if you're interested in hearing more on the regulatory front, check out our other episodes that include discussions with the SEC, CFTC, and the European Commission, DG FISMA.

Welcome to the podcast, Sacha Sadan. It's great to have you here and thank you for taking the time today.

Sacha Sadan:

Hi Jason, lovely to be here, and lots to talk about.

Jason Mitchell:

So much to talk about. I'm really looking forward to this. So, Sacha, we have a lot of questions that you want today, but I'd like to start on something that's a bit personal. What was your motivation for leaving Legal & General for a regulator? What's been your experience and observations as you've transitioned from being an investor to being a regulator?

Sacha Sadan:

Jason, well, I get asked this quite a bit and a few people were surprised at first when I joined the FCA 14, 15 months ago. So I have to take a step back because it really does help for this journey. My first job for 10 years was as an asset owner at the University Superannuation Scheme. And we run money for end pensioners and I still in my heart of hearts still think about the end person whose money is at the end of that wonderful pot that people talk about, whether it's savings, whether it's pensions, or all the things that happen. And so even from that, I've always cared. And that's how I moved into from equity investing to hedge fund investing, to eventually corporate governance, stewardship, ESG. I was looking at how we could make sure that the end customer, the end owner was looked after because wonderful things that capitalism is.

There are a lot of people that are in the investment chain and the phrase is leakage and there's a lot of leakage between that person putting money into a pot and getting it back in 20-odd years' time. And so it's always been something that I've cared about. I didn't think of it and I couldn't have articulated it as well as I do now, but therefore it sort of made me move more towards that. And going to a consumer regulator just seems a natural fit. Secondly, and I think this is important, I loved my time at LGIM and I worked there for a decade, but what I was seeing is as I was trying to influence regulators and filling in consultation papers and influencing them in different ways privately and it seemed a natural fit to try and move to a regulator and do it from the inside. And they've also wanted, someone who'd been in the industry, has got quite a lot of gray hairs and some scars of trying to get this done inside an asset owner and an asset manager. And so it just felt right at the time, and as you and I are going to talk about, there's so much going on in this space that actually having people who know and have networks of ESG I thought would be really useful for the industry and I'm thoroughly enjoying it.

Jason Mitchell:

Absolutely. It sounds like a really interesting professional arc. The FCA is expressing its anti-greenwashing SDR work through the lens of the consumer as you just said. I imagine it's easier to regulate on your core mandates of consumer protection than on ESG itself.

Sacha Sadan:

So the first thing is we are a regulator that has a mandate to protect consumers. We also have a mandate to make sure that the markets function effectively and with integrity. And if we just take a step back and you've used the word greenwashing or any of these sorts of phrases that we can talk about, when you do any surveys of any consumers, you'll start to find that they are confused. They're also losing the trust for some of these products. Hence, why there's this phrase called greenwashing and some of the stats are pretty or inspiringly bad that they think... I think one boring money survey recently with a lot of consumers said that 81% of consumers don't trust green products. That's really not good and it's not good for the industry. And when we did our discussion paper on our labeling work and our disclosure regime, nearly everyone said, we want some guardrails, we want some things to help us because it's been a bit wild west out there.

Now that's quite understandable in a new industry, but that means we do have a mandate for it. Secondly, the consumer wants to buy these products, all the statistics. Now, by the way, why do you think people in a commercial organization are putting these labels on there? Because they think they will sell. And we know that ESG was one of the fastest growing areas of asset allocation. So there is a demand, there is a supply, and we just need to try and make this system work better. We can't do everything. We are the FCA, but we want to help. So we have definitely got involved in disclosure and labeling and we've just come out with our proposals and the consultation, which has come out a month ago. So we'll go into the detail, but the consumer wants it. We should protect the consumer. But the industry has also said to us in many, many formats, including written responses that we'd like some guardrails to help get this industry back on a credible footing.

We're not starting from scratch. There has been some good work and especially from the EU, but the SCC is doing some work as well. But we are very fortunate that we have a flexible regime. We're very fortunate that we put 17 industry leaders in a room for six months and did lots of meetings and testing with them. And we are very fortunate that we've got 17,000 consumers in our panel, 17,000, not just a hundred like you'd see on some of these adverts. And we keep testing things. And so we've done a lot of work to make sure that this works. And I'll give you one example before we go into any detail. We thought the word transition was a good word for putting into place one of the labels sustainable transition. But consumers don't like it. Consumers don't understand it. Transition to what? What do you mean?

And they get confused and it's not just about climate. So once we tested them, they liked the word... The best word they liked, the word that worked the best for them was improve. So we've changed our work to sustainable improvers that you can own something and try and help improve it. And that's the same with stewardship. Wonderful word. I used to be a director of investment stewardship, but consumers go, "What does that mean?" I don't understand that. Give me examples of how you influence. And so we got to make sure that we make this language for consumers, not for the asset manager industry or anyone else.

Jason Mitchell:

Can you talk about finding the balance between ensuring high-quality sustainability products for the consumer and more broadly driving capital flows to support the UK's net zero transition?

Sacha Sadan:

I think the first thing we've got to start with is that we are not going to steer people. It's not our job to say you should be buying either equities or alternative investments or bonds or you should only buy green funds. What we've found anyway and so has all the commercial marketing people is that when they do analysis of their consumers and customers that if they can put their money, make a return and do some good or some influence, they are much more willing to do that. And therefore there is a trend to that. Now of course, we want to get to net zero and we have a mandate, as you said, to have regard for net zero. One of the ways to do it is make sure that there's trust and credibility so that the market has that. Secondly, when we've surveyed these consumers when they have more trust and they've read the consumer document, which we're going to talk about in a minute, the laboring, they go, "Now I feel more confident to put more of my money into that."

So it works, but we are not telling people to do that. And secondly, and I'll make this straight up front, it's absolutely fine to sell an investment product that doesn't want to be sustainable. That's absolutely fine. There are many great products out there and I can say that even as the director of ESG, the difference is I don't want them to say that it's half sustainable and to try and use that label when they're not doing that. But I've seen some great dividend income products out there or bond products that don't want to take sustainability into account and that's okay, but you can't have your cake and eat it. That's the difference.

Jason Mitchell:

It certainly sounds like the SDR is raising the bar for sustainable funds, but is there a risk that good... And I don't mean necessarily great, but good products get swept away alongside with bad products. For instance, there are many UK funds that essentially only implement exclusions in some kind of ESG score, some tilt, and those wouldn't necessarily qualify for a label.

Sacha Sadan:

So first of all, we are taking our time. Not too long, so some people say we're getting too fast and then other people say we're getting too slow so we must be doing something right. Secondly, we are consulting and we are listening to the industry, not just that 17 person labeling advisory group that's been working very tirelessly to help us, but we've now put the consultation out. Thirdly, even when we put the labels out, an existing product will have another year and we are doing much education to get to this stage, but yes, we are trying to raise the bar and you can't raise the bar without having some people that get left behind.

So I think we have to get that balance right. That's why we have a consultation out at this moment and we have these debates and stuff like that. But I absolutely think that a product... A large product that people think can just take out certain sectors and not trying to do anything with the money that is in there does not deserve to have a sustainable label. Just excluding something doesn't make it good. Back to your point and good is a word that I try not to use, but they surely... And that's why we're going to give people time could think about with that money. Are there any objectives or measurements that they are thinking that is linked to improving the sustainability outcomes? If there aren't any... And they've got time to think about this, then they should take away that label.

Jason Mitchell:

Regulatory fragmentation is a big and growing concern for the industry. How do you see the SDR addressing this?

Sacha Sadan:

Well, first of all, as I've just said, I'm very much making sure that there is an improver label. So it's okay to be involved in funds, stocks, asset allocation bonds that are not always a natural bedfellow with sustainability. But if we are going to get to something, so obviously, the one we talk about is climate, we are not going to solve climate by ignoring massive sways of this industry. We're very much making sure that they are industry is inclusive, not just exclusion. So I just want to make that point, it's very important. And that is slightly different to some of the things that have happened from SFDR, which was unintentional when you talk to people, they didn't want it to just be an exclusionary approach because that doesn't always work. By the way, there's nothing wrong with exclusion, but just exclusion on its own is not always enough. As we've just talked about.

And I'll give you one example now because I think it's really important, and I'm purposely not using climate change. When I was at Legal & General, we were the first asset manager for... I think the first globally to start voting against all-male boards. And that's become quite a big trend. But this is 2012, 2013 and there was quite a lot of discussion about whether that's the right thing to do for an asset manager. But it was about trying to influence all companies, not just own companies that had women on their board because this is about improving the landscape for all. And now in the FTSE 100, there are 39% women on boards compared to 11% in 2012. That is the way to do it, stay in the tent, influence, and use active stewardship or in these sorts of words improvement.

And so I think that's important. But to go back to your question, we are making sure that a lot of these labels link into TCFD and we've been one of the first regulators to mandate that for both listed companies and now for asset managers and asset owners. So we're trying to use that, as we... And we are working very hard are my team, but with others to make sure that we get international sustainability standards board up and running and the metrics, those metrics should be in the label. So we are trying to use international standards for that, but I'm not going to be an apologist for saying that we are working from what others have done. So the EU did some great work on SFDR and we've raised the bar from there. The question I get asked is are we raising it too far? I don't think we are, but we are listening and we are mapping a lot of Article 8 funds to some of our labels. But we are different because when you go second or you go afterwards, you can learn the best practice but there will be slight differences. But we are giving people time and we think this is the way that we'll evolve and I think other jurisdictions will move here. So listening, using global standards but also trying to make this as good as possible for the consumers that we are trying to protect.

Jason Mitchell:

How do you see the FCAs approach acting as a kind of bridge between different regulatory regimes? Is there an opportunity for the SCA to act as a leader towards greater global conversions around sustainable finance regulations?

Sacha Sadan:

I hope very much, it's never for yourself to say the word leader or thought... I hate someone saying that they're a thought leader. What we are trying to do though is we are trying to work with other regulators. I was in Singapore, I've been in Brussels, I've been in Washington recently and we are trying to do something that is consistent. So I can't tell you how much work we're trying to make sure that ISSB fits with [inaudible 00:17:03] and the EU so that we are making sure that that has consistency and that there's a lot of good stuff going on there. Secondly, we're going to talk about ESG ratings later, we'll make sure that our work is linked to IOSCO, the International Securities Regulator, and consistent with the Japanese have just come out with some thoughts on ESG rating. So we are absolutely trying not to just go off and do something that is on our own and have a plat in them standard that can't be withheld with others.

So we are trying very hard to link all of our work together. The team are seen as flexible and because of our regime, we are seen as being able to do things relatively quickly. So yes, we want to help on that and hopefully, for my investment background, there aren't many regional asset managers around now, and therefore... And there aren't that many regional companies or bonds. So we have to make sure that we have more global standards and it's something that is absolutely integral to the work that we do. And IOSCO, the International Securities Regulator... We are working and we are on all of their work streams trying to make sure that that happens.

Jason Mitchell:

The FCA's anti-greenwashing rule comes into effect in June 2023. This kind of say what you do, do what you say approach, I wonder if it potentially misses an opportunity to drive a more common definition around sustainability because the SDR doesn't provide a template for disclosure.

Sacha Sadan:

Well, listen, so I get criticized and I don't mind the team get criticized for going too far and then they get criticized for not going far enough. One of the things that we've listened to the industry is that it's still very early in terms of taxonomies and definitions, but yet we don't want to wait. And the industry has told us and the consumers told us we want to have more credibility on products, we want some guard rails. So we've gone for the regime to start with, first of all already fair and misleading products. There is a rule on that and ESG should not be any different. You should be fair and not misleading to your consumers when you are selling them products. So we've just tried to define that a bit more. But what until... And by the way, even with green taxonomies, that doesn't have all the sustainability areas, so we don't want to wait for that.

And why does sustainability so important? The phrase ESG doesn't just have E in it, so we must make sure we think of S and G. So we think we are taking a balanced approach that if someone thinks that their product is sustainability, they have to explain what their definition of sustainability. And it might be one of the taxonomies that's out there. It might be slightly different, but they should explain it because the end of the day the consumer needs to understand it and as long as the consumer when they're buying it says, "Ah, 70% of that product is going to be in sustainable investments defined by this, I understand that and I want to go and buy it." That makes sense. But as we go forward and as the industry evolves, we will move that and we can review that. But we wanted to go quite quickly. And the other thing we're using very much so entity level, each firm has to talk about its TCFD disclosures, which is consistent globally.

Jason Mitchell:

Let's talk about everybody's favorite topic. Enforcement. What's the FCAs view on regulatory intervention as a tool to drive best practice? It seems like they're two very, very different enforcement models that we've seen. The EU has been faster to regulate but slower to enforce while the S E C has been slower to regulate, but obviously, quicker to enforce under traditional misselling rules.

Sacha Sadan:

Well, so my personal view is, we are in the foothills of the ESG and I've been in it for a long time, but we are still early. And by the way, there are some amazing things going off that we'll talk about later. But transition plan templates has come together from COP26 and announced and has now been published at COP27, so within a year. I think it took 20 years for some of the accounting standards to happen. We've set up international sustainability standards board within a year and there's two big sustainability standards out for consultation already. And it might be in place early next year. This is going fast. So I think things are going well, but we also understand that it's very early to start getting the stick out. It doesn't mean we shouldn't. And that is one of the absolute reasons I joined a regulator is that you do have tools in the toolkit rather than just vote against or exclude.

And we are starting to use that. We've written letters on the dear chair about what asset managers are doing on stewardship and we are following up on that now about improvement. And that's using the tools that already exist. We are talking to other regulators all the time and some of the work that we've done has been linked to other people's regulatory approaches. So I think we are learning and we are doing that. We've also had 27 regulators in recently where we did a tech sprint on how do we find technologies to spot greenwashing with 27 international regulators. So we are all scratching our heads and trying to work out how to do it. And then secondly, you just talked about the labels. We are putting these in place so that you will not be able to use certain words or have a label. And if you don't do that, we can take that label away afterwards.

But we will make sure that a new fund doesn't get that label if it doesn't meet these criteria. So we're trying to use all the tools, but I am very comfortable for now to be using nudges or as an example... Let's use another practical example. We mandated all listed companies to do TCFD reporting. We vote to report with the Financial Reporting Council saying what we saw was good, but where we saw weaknesses, I think it's our job to help the industry and help them get better before we use the stick too much. But don't underestimate that we will use the stick where we need to.

Jason Mitchell:

We've seen some greenwashing cases out of Europe, out of the U.S. We haven't seen any from the UK. Does the FCA believe the industry is doing a relatively decent job on ESG disclosures?

Sacha Sadan:

I think two things. You don't see everything. So some of the discussions we have with companies are private. We have told companies to do things differently. We have tried to help them, but you've also seen some of our other regulatory colleagues coming out with things and we've had market intelligence and shared that with them. So it's a bit of all of the above. But no, I do think there are definitely things that need to be done, hence why we are doing all this work, not just in the background, at labeling and at stewardship level. And we'll talk about a couple of other things in the investment chain that are needing to be done. So the industry does need to get better and we are trying very hard to help the industry and where needed we will use that enforcement. But enforcement comes in different ways. It can be rewrite a document, it can take away an advert, it can be lots of different things rather than just a large fine that gets publicized.

Jason Mitchell:

How do you see the labels evolving in some sense to accommodate different types of asset classes and investment strategies? How much flexibility do they allow for? For instance, expectations around the label sustainable impact seem very anchored in the traditional definition of impact investing, which is highly dependent around additionality. Additionality as you know, is a bit tougher to kind of prove out in a listed environment.

Sacha Sadan:

We've gone early, but of course, we'll evolve and we've already announced that we'll review this in a few years to make sure it works. But absolutely impact, it's very important. If I'm a customer and I buy a product and I say I'm doing impact on carbon, you can't buy someone's secondary carbon product that's already out there and not make any influence and call that impact. Someone has already put that capital in and made that impact. If on the secondary market you can influence that and change that, then you can explain that and you can put that into an impact. But I do think additionality is important, otherwise, you need to put it as a different label now. I think that's quite important. Secondly, we've spent very much time, and I know that you talked about this with me before about alternative investments. We don't want to make any of these rules favor either equities, active equities, index equities, fixed income, alternative investments, real assets.

That's up for the consumer to decide what they buy. We just want them to make sure they understand it. So we have put some things in all alternatives as well, but we're absolutely making sure that if you say that you are an improver, what have you done to improve then? And what would you do if it doesn't improve? What's your stick? Just like you asked me about my stick and therefore I think it's fair enough that people put some targets out there or some KPIs, but we will look at this, but we are very clear that we do not want, and if anyone thinks that our labels are promoting one asset class with another, we would like to hear about that because that's not the intention. Secondly, I think it's really important that we work out that this is not about what we want. This is about what consumers want.

Jason Mitchell:

How does the FCA see asset managers actually fulfilling the sustainability objectives, especially when they use a sustainability label. In other words, is the FCA doing anything to help asset managers in how they can gather the right data, the right information? Or is the view that this should be left entirely to industry, hence initiatives like the ESG Integrated Disclosure Project?

Sacha Sadan:

No, we are working really hard. So a good example, first of all, we're trying to help the industry on vote disclosure. So the industry has told us that there's so many initiatives out there and there's so many different managers, consultants, owners who are telling them they want voting in this template or in this template and they said they're spending too much time trying to manage reporting than actually doing stewardship and all the things that we talked about. So one, we're trying to help the industry. We convened the Vote Disclosure Group run by Deborah Gill Shannon and ex-asset owner to try and put best practice in place. So that's to help the industry, but it's also to push the industry to say, make sure that you disclose on a timely basis with rationale, but hopefully, do it once, do it well and therefore it's efficient.

We've already announced that we want to regulate ESG ratings because asset managers tell us that ESG ratings are pretty good, but there's transparency issues, there's a bit methodology and there's conflicts of interest. And so we're trying very hard to help that industry. And that's also the corporates have told us that that's important. And ISSB, let's have one set of metrics on sustainability globally that will make everyone's job easier when they're trying to run money and they're trying to work out... I don't know, we only want to buy the best funds that pay their supplies within 30 days. Well, we want a metric on that globally that people could use and then they could have a KPI on that and tell their consumers that they are trying to buy companies that look after their suppliers, perfectly trying to not use a carbon emission number. But no, so we are trying to help the industry in quite a lot of ways like that. And then you've just... I think I've answered it already, but the TCFD, we've asked them to put those reports out. Well, we are also trying to give them some best practice examples weaknesses so that they can report this better next year. So we are trying to be collegiate and helpful with the rules that we put in place.

Jason Mitchell:

I want to come back now to the alternatives point that you made just a little bit earlier. In my view, the FCA deserves an incredible amount of credit for being the first regulator to directly address the role of hedge funds and alternatives in sustainable investing. The FCA recognizes the role of short selling and derivatives to contribute to positive sustainability outcomes, but it kind of largely takes a transparency-driven approach. Specifically it asked for firms to explain how short selling aligns with the products stated sustainability objective. What is the FCA trying to achieve here and how should market participants think about it?

Sacha Sadan:

Well, remember we have gone early compared to other regulators and I think it would be very strange to go very prescriptive too early and again, come back to our consumer lens. I absolutely... And from my own industry experience, if you can make a return on some of the shorting that can help benefit a fund's performance, that can be a very positive thing for a consumer. But make sure they know that, make sure they know what those fees are and how they get them. But what we don't want is to say that one thing is better than another. So we've purposely made sure that we talked about alternatives because it's okay, there are many great funds out there that are doing alternative investments or using alternative investment strategies. And we didn't want... As I hopefully mentioned before, favor long-only products versus alternatives because they are part of the mix.

They're a very big part of the mix and I've known that for many years. But what we want it to do is a consumer to understand how it's there. But a good example the other way around, and we've already pushed on this, you cannot say... And one firm did this once and it doesn't do this now, but if they shorted an oil and gas stock, they can't short it and then say that's reducing carbon emissions because that oil and gas stock doesn't even know that you are [inaudible 00:30:44], it couldn't care less because someone else has bought that stock. And that's just not actually anything to do with voluntary carbon markets. So we've got to make sure that it's just more transparency for now. Of course, as we get going we will evolve this and so will the industry. And also as there's more metrics out there, sustainability metrics because I want alternative strategies to also put some metrics out there that are linked.

Jason Mitchell:

Yeah, it's really good to see the FCA take a more constructive approach and sort of try to build a bigger tent around sustainability with regard to alternatives. It's also interesting, good to kind of hear that you talk about that nuance in terms of netting and shorting because for me it's at least interesting that the IGCC obviously, had sort of put out an important report in my mind around this kind of expressing its greenwashing concerns around this netting discussion in a real-world impact context. And you've even seen... As I'm sure you know, the SEC in the enhanced ESG disclosures from May 2022, make a point of question which seems to reveal at least a bias which aligns with your view.

Sacha Sadan:

And just on that, we are working with IOSCO really hard and the CFTC in the states on assurance on voluntary carbon markets. So the other way around, not just stopping some of the erroneous behavior, trying to promote the good stuff. If we get more assurance on what is a good voluntary carbon market and on offsets which is happening, then we think that will also... I think it will unleash once there's more trust in this market, some huge areas for asset growth. And I think then more products will come out with more impact and hopefully, in sustainable impact here because they will be able to buy things with a lot more confidence that it is really offsetting, that it really does exist. It's really in a market that matters and it's something with metrics that people can believe.

Jason Mitchell:

That's great to hear. In the podcast we did with Chairman Rostin at the CFTC, he expressed the same thing.

Sacha Sadan:

Yes. Absolutely. We work with him and he's doing fabulous work.

Jason Mitchell:

Fantastic. I want to change things a little bit. There's this growing divide that seems to be kind of emerging more and more among different regulatory regimes as well as some standards. It's rooted in that distinction between U.S.-style, financial materiality and that EU-style double materiality. The SDR appears to recognize double materiality, at least it clearly did in last year's consultation paper, but it doesn't formally require it through disclosures like the principle adverse impacts and do no significant harm. What's the end game? What's your thinking around this in the long term?

Sacha Sadan:

Okay, so there's a lot of talk on this. A lot of talk, and I don't mean just in our own industry but also from [inaudible 00:33:30]. There's a lot of philosophical debates about single and double materiality and stuff like that. I take a step back, I really do and I think there's some great stuff that we can do going forward, but we've got to start somewhere. And I think we've talked about this, the first lens if I'm a corporate is I have to put an... And I've always thought of the annual report as the encyclopedia, the one document that is there for an investor, whether it's a credit investor, a short seller or equity investor, or anything else to try and work out whether I think that the risk and reward of buying whatever that product is, is correct and I need that information to make that decision.

I need the material information, financial material information. And that might be lack of board challenge, it might be governance, it might be that they never pay their supplies and they might lose their contracts. It could be lots of sustainability or non-financial reporting things. And so I do take an investor lens to start with. Of course, if we think of an investor lens in a bigger, wider, longer, period of time, that brings in lots more things. So it is a time horizon, but I'm really conscious that we do as much as we can to get the information and also help corporate so that they can give the right information timely and material that matters. And another player that is in there that we haven't talked about is the auditing community. We need the audit of the financial reporting accounts to take material things in there. And if climate change is really material and is going to affect the business model, then I'd like to know that that is being audited as well. So we are working on that. But also, just to know when I've discussed this with many companies, the difference between their reporting on single and double materiality isn't always very big. So it's not as big a discussion as it really could be. And all I'm saying to start with is let's get something done. And that's why I'm really pushing for the ISSB, which most asset owners and asset managers are.

Jason Mitchell:

Yeah, it's good to hear that. I never know if I'm kind of ringing my hands and being a bit of an alarmist around this because it does to me kind of feel like a real divide between something in the U.S that is an established fixed legal principle going back to I think a 1933 sort of securities case law all the way up to the Supreme Court and on the European side it's much more dynamic, right? The term around materiality, it's not so fixed. I do wonder how to reconcile this, whether it's through the ISSB and your work with IOSCO or the regulations and how the FCA is trying to of balance the interests between the EU and the U.S.

Sacha Sadan:

It's a difficult one. I'm not going to shirk that, but I do think let's just get on with something, we need to start somewhere. I think investor materiality to start with in general, of course, not forgetting... I really care passionately about double materiality, but if I'm a pension fund, I want to accumulate all of the knowledge I know from each of the assets I've got. And then I might need more detail on top of that, but I can't put it all on the lens or the onus of the corporate to start with. But if it's material and it's going to affect my money, I want to know about it and I want to have the right data for it.

Jason Mitchell:

Where do you see the FCA turning its attention to next? You've talked a little bit about ESG data providers and voting regulations and pulled funds. What about different asset classes or areas like green mortgages, green securitization, even crypto, and its ESG implications?

Sacha Sadan:

Well, the wonderful thing about this role and wonderful thing about ESG and sustainability is there's a lot of things and there's a lot of important things. I'm very fortunate that one, we don't do it on our own, we work with others. And two, the FCA has great convening powers. So let's give a few examples. Personally, labeling is great, but one thing can't do everything. We can't either make it all on asset managers or asset owners. We can't also make it all on corporates. So in the investment chain, and I've been involved in the investment change for so long and I talked about the leakage and all the players in the system before we get back to the end pensioners' money. So we are trying to work on all of those areas that matter in some kind of way. I gave an example, the auditors. The auditors are really important and we want to make sure they are sure.

So there's a really good international work stream that we are co-chairing on making sure that they can assure ISSB metrics. We haven't even got ISSB out there yet and we're already thinking about the assurance so that we don't waste time. Secondly, ESG ratings, we know they're really important in this industry. They're becoming quite a big allocator of capital. People are saying if you've got a good ESG rating, we buy more of you. And if you've got a lower one, we buy less of you. Well, how has that evolved? There's some great ratings out there, but what's the transparency? And more importantly, we've been here with credit ratings and the agencies, what kind of things do we need? So we are not telling people that they can't do their own methodologies, but we want to know how clear they are. And also when we talk to the corporates and the asset managers, they say, we sometimes think there's an error in those ratings.

Where's the right to reply? How do we get that? But without trying to influence something, that's a methodology. So we are working on ESG ratings. Voting isn't everything. And I spend my life saying that voting isn't everything, but it's important and consumers care about that. But when do they get disclosure? Where's the consistency on that? What about a rationale for why they did something or why they didn't do something? So we're trying to work with that and we've been convening that. So on ratings we are convening a code of conduct to start with and then regulate, but with the industry. Vote disclosure we're doing with the industry, labeling we're doing ourselves, auditors we're doing with other people. Then the other areas, the sort of newer areas... Well, we've been told by other people and the UK government and global regulators that we should be regulating crypto.

When we do that, we should make sure that we take carbon emissions into account. So we are working closely with our regulatory colleagues globally, but also internally to make sure that if and when we do regulate crypto that we are thinking about carbon emissions in there because we hear all these great stories about how much intensity, but it's very difficult to know because there's no regulation. And then the last one you mentioned green mortgages. Again, if we are going to have regard to net zero by 2050, the mortgage market, the insulation market is huge. So we are convening again a round table with all the mortgage players in the UK and some of the great players in green to work out what are the impediments. Again, it won't be the FCA that does all of this, but we try and help this market grow.

And if we can take away some blockages and let people use capitalism to grow, then that's great. And lastly, really importantly, we don't want green mortgages just to be for people who can afford to put expensive insulation in. We've got to think about the just transition, which is back to the yes, how do we come up with products that other people can use? So maybe you finance it in a different way so different consumers can get energy efficient without having to put upfront money, but that might need financial products. And the FCA has a role in there. So lots of things on the agenda.

Jason Mitchell:

How do you see the UK's green taxonomy developing? What are the lessons learned from the EU taxonomy and others? What are the pitfalls and how do you see it addressing the short-term realities of the energy transition? For instance, I believe the Korean taxonomy now includes both natural gas and nuclear. Clearly, the EU taxonomy has had to shift a little bit as well.

Sacha Sadan:

Well, we're only an observer to the Green Technical Advisory Group for the taxonomy and it's run by the HMT. But it's important work. Lots of stuff's been happening on there, but we are not waiting for it to do all the things that we are doing and it's only green. And of course, that's important, but we're also looking at the wider sustainability. So I wait with interest to see when that comes out, but I'm working very hard to make sure that we are not waiting for one or another taxonomy. But I do think what's important as well is that we don't think that one definition always works because we've had this debate already, and as you've just talked about, nuclear is now much more positive after the tragedy of the Russia-Ukraine crisis. And I think it is important that we are flexible in these things and people explain that to the consumer.

Jason Mitchell:

Antitrust relating to sustainability activity is a key concern for the finance and asset management sector. Could the FCA along with say the Competition and Markets Authority provide a clear regulatory signal to allow collaboration around specifically climate action. During the pandemic, a similar safe harbor was provided for pharmaceutical companies. Surely the climate crisis is as urgent as the pandemic.

Sacha Sadan:

Well, hopefully, from the things that you've been talking to me about now we are saying that one, we can't do everything and nor should we. But two, one of the roles as a regulator is to work with other regulators, another areas where there are blockages. So there is one practical example already we and others helped, the CMA helped for Lloyd's of London, the syndicate to think about coal and how it wanted to tell its syndicate members about maybe having a ban on new coal investment. But it wanted to make sure that it wasn't broaching any competition rules. And so we helped on those sorts of things. And there are many examples like that. I've met many lawyers from big financial regulatory authorities and companies and said, where are the blockages? And I have to say, this is a call to arms for you on this podcast as well.

I hear much about why you can't do things on antitrust. Less so in UK, but I do hear it that we can't work. Well, give examples, come to the FCA and we want to try... We can't guarantee, but we want to try and unblock. And you've mentioned that I want practical examples rather than what happens sometimes. And no offense to wonderful lawyers and legal challenge, you just can't do that. So we are trying to work out ways to do that and yes, it is something that is important and that's why we had that call to arms to many people in the industry. But so far I haven't been given enough examples of where we should act. And I'm calling you out for please trying to get us some examples.

Jason Mitchell:

That's good to hear that.

Sacha Sadan:

I hear blockage is a lot, but I don't hear a practical blockage that I can... Not I, the SJ, but other regulators need to do. Now there is something like you talked about on the pharmaceutical, and I think we do need a bit of safe harbor, but give us an example of where you really need it.

Jason Mitchell:

Last question from me. The FCA announced over the summer that it was building out an ESG advisory committee. It sounds pretty exciting. Can you update what we should expect?

Sacha Sadan:

Well, like all of us, whether it's a corporate, an asset manager or any of us, this is an evolving area. It's hard to get expertise. We also want to know things that are going on. And if you're the board of the FCA, they want to know, they want to challenge my team quite rightly. They also want to know what the next areas are going to be. And you can't always get that with your existing board directors. And that's the same challenge that all corporates have. We decided a while ago that the best way to get the flexibility was to set up an advisory committee. We've been absolutely flattered to have over 220 great applications for people that wanted to do this. And by the way, there's no money involved. It's for the good of trying to be involved for the FCA and help all the things that we've talked about.

We're about to announce the final people that will be in it. Those people you will know in your industry, most of you will know all of them. We have purposely not just picked E people because this is ESU. We have people with a legal background and we just talked to antitrust, people with an asset owner consumer background because we are a consumer regulator, and people who've worked in a corporate and had to try and manage disclosures. So we are trying to get a bit of a roundness to this that can help and give us some grit in the system and hopefully, make us a better regulator going forward. So I'm excited about it. I think it will come out in the next few weeks. So therefore this is again, a regulator that's trying to move at pace, but also listening to the industry and using the industry to make sure that what we do is global, collaborative, and in the interest of capitalism.

Jason Mitchell:

It's great. It sounds exciting and I'll be looking forward to that announcement. So it's been fascinating to discuss what the FCAs new SDR framework means for investors, how it aims to provide anti-greenwashing protections, and why we need to work towards greater harmonization across global disclosure standards. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, Head of Responsible Investment Research at Man Group, here today with Sacha Sadan, FCA, Director of ESG. Many thanks for joining us on a sustainable future and I hope you'll join us on our next podcast episode. Thank you so much, Sacha. It's been fascinating.

Sacha Sadan:

Absolute pleasure. Thank you again, Jason.

Jason Mitchell:

I'm Jason Mitchell, thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.