MARKETS & INVESTING
In November , the FCA published its long-awaited ‘ Sustainability Disclosure Requirements ( SDR ) and investment labels ’ policy statement ’ – with the aim of ensuring that financial products marketed as sustainable do not mislead consumers . This is an important moment for our industry and one which , in our view , will help customers navigate a complex landscape and ultimately combat greenwashing . Given the recent growth of the industry , the number of new entrants and the range of terminology currently used ( often interchangeably ), we believe bringing clarity to the market is essential and our primary reaction is one of support . The final policy statement has taken into account our feedback on several points , including on the concept of additionality , the need for an absolute measure of sustainability and support for qualitative standards to reduce reliance on ESG ratings . In our view , the final set of rules have found a good balance between principles and prescription , which should avoid many of the pitfalls seen in the EU ’ s Sustainability Finance Disclosures Regulation ( SFDR ) regime . Our intention is to adopt the Sustainability Focus and Sustainability Impact labels for our entire fund range at the first opportunity , with our Multi-Asset range adopting the Mixed Goals label with each sub-fund investing in a blend of Focus and Impact strategies .
Rebuilding trust The SDR regulations have , without a doubt , raised the bar in terms of what it means to be a ‘ sustainability ’ fund in the UK . This will help underpin trust in the market , and there are several elements which we believe are particularly important . Firstly , we welcome the introduction of a 70 % threshold across all the labels ( not just for the Sustainability Focus category , which was proposed during the consultation process ). This threshold sets the minimum level of qualifying assets a fund must hold to meet a product ’ s sustainability objective . While applying this threshold across all labels will certainly reduce the risk of unaligned or unexpected holdings in ‘ sustainability ’ labelled funds , and thereby protect consumers from greenwashing , we did advocate for the threshold to be set higher and would continue to support this . We were also pleased to see the FCA state that ‘ absolute ’ measures of sustainability should be used , not relative standards . Linked to this , they have stated that ‘ best-in-class ’ funds would not be suitable in the Focus or Impact categories . This aligns with our belief that assessments of sustainability should be based on absolute standards of responsible business conduct – not on choosing ‘ the best ’ of harmful sectors like tobacco , oil and gas . Finally , we welcome the inclusion of a requirement to ‘ do no significant harm ’, believing strongly that positive environmental and social outcomes should not be pursued to the detriment of people or the planet . On this point , we are pleased that the FCA has avoided being too prescriptive around key performance indicators and measurement of this , which should avoid some of the over-reliance on third-party data providers seen in the EU ’ s SFDR regime that would have increased costs and potentially raised issues around standards .
THE SDR REGULATIONS HAVE , WITHOUT A DOUBT , RAISED THE BAR IN TERMS OF WHAT IT MEANS TO BE A ‘ SUSTAINABILITY ’ FUND IN THE UK .
Scrutiny on stewardship One of the main talking points of the SDR regime has been around stewardship , and we are pleased that the FCA has specified that firms must identify , and adequately resource , the stewardship strategy needed to deliver their sustainability objective . Without this scrutiny , the industry risks engagement being used to justify any holding in a sustainability fund under the guise of ‘ improvement ’. Whilst we are strong advocates of the power of engagement to drive change – indeed it is a key pillar of our responsible and sustainable investment approach – we don ’ t believe it can be used to explain away any ( potentially controversial ) holding in a sustainable fund . In our experience , some companies do not have the willingness or ability to transition to sustainability . The management team may not have the appetite to shift the business model away from harmful activities . Indeed , the financial case for holding a company may collapse were it to move away from these activities . For example , engaging with McDonald ’ s to lead to healthy choices for consumers is unlikely to transform the business into anything other than a fast-food restaurant . Engagement needs to be used realistically , where there is a genuine chance it will lead to change within a reasonable timeframe – and we ’ re pleased to see the FCA asking firms to evidence this .
Impact in public markets Finally , we welcome the inclusion of public market equity funds in the Impact category . The initial proposals included a requirement to demonstrate ‘ additionality ’ ( i . e . that an investor ’ s capital is exclusively allocated to new projects ) which is generally only viable in private markets and would have made the label less relevant to a retail audience . We are pleased that the FCA has recognised this , whilst ensuring the category remains credible through requirements to demonstrate investment ‘ intentionality ’ and provide a corresponding ‘ theory of change ’ which maps the steps between the intention of an investment and its outcome . We see the policy statement as a positive step forward for the industry and one which will help combat greenwashing and build trust in the sustainable investment market . Given our longstanding approach to Responsible and Sustainable investment , our product range – and , indeed , our processes , governance structures and fundamental purpose as a business – is intrinsically aligned to the FCA ’ s new SDR and investment labelling regime .
For more information , please go to www . edentreeim . com
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest . The value of an investment and the income from it can fall as well as rise , you may not get back the amount originally invested . Past performance should not be seen as a guide to future performance . EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association . Firm Reference Number 527473 .
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