The Financial Conduct Authority (FCA) has confirmed over 30 funds have successfully applied for the Sustainability Disclosure Requirements (SDR) labels ahead of the 2 December deadline.
Firms have been able to apply for one of four labels under its new regime, which include: Sustainability Focus, Improvers, Impact or Mixed Goals. These are designed to create a clearer categorisation of a fund’s goals of trust and transparency. However, the FCA has faced some pushback within the industry, with some funds experiencing difficulty in finding the right fit for their sustainable funds. Earlier this year, the FCA was criticised for rejecting groups’ applications with little explanation of what needed to be addressed in the objectives, and successful funds such as WHEB Asset Management told PA Future its FP WHEB Sustainability fund, which adopted the Impact label, now has an investment objective and strategy of 12-14 pages long.
See also: ‘SDR implementation is far more challenging than we ever anticipated’
Later, the FCA released ‘good practice’ guidance to support firms.
On the 2 December deadline, the FCA confirmed over 30 funds had applied for labels. A spokesperson said: “We have been notified of 30 funds intending to use investment labels. In addition, we are seeing strong interest from a number of firms that have submitted applications and expect to see more funds adopting labels over the coming months.”
Hortense Bioy, global head of sustainability research at Morningstar Sustainalytics and member of the PA Future Committee, said, “like everybody else” they expected many more labelled-funds given there were more than 400 UK-domiciled funds with ESG-related terms in their names at the beginning of the year.
“It’s been a laborious start and we can expect more labels to be approved next year,” Bioy commented. “But I doubt we will see more than 150-200 labeled-funds by this time next year. It will depend on investor demand. Meanwhile, we can expect many more non-labelled funds with sustainability disclosures, which may be an unintended consequence of the regulation.”
Notably, no group has yet publicly confirmed a sustainability label under Improvers or Mixed Goals; the majority have received a Focus label with around 20 funds, and the rest are Impact.
Bioy said the lack of “improvers” labelled fund so far is “disappointing”.
“This label was initially very welcome by the market and a major sustainability theme today is transition finance and transition investing. There is broad consensus that all sectors of the economy need to transition in order to reach net zero by 2050.
“[However] the FCA set the bar quite high with very specific requirements for the Improvers label. For example, asset managers are required to explain how they chose the scoring or threshold set for improving assets and why they think it’s appropriate for defining sustainability. Additionally, managers need to provide evidence that the assets have the potential to meet a robust and absolute standard. They also have to set short-term and medium-term targets. So far, asset managers have struggled to meet all the requirements.”
In terms of the Mixed Goals label, Bioy said this is less of a surprise: “Given the challenges that asset managers have faced to meet the strict requirements of the other three labels, it’s no surprise to see the low level of appetite for the Mixed Goals label, which was designed for funds that want to combine at least two of the other three labels.”
Here, PA Future rounds up some of the latest funds to have confirmed they are adopting SDR fund labels:
Schroders announces plans to adopt 10 SDR labels
Schroders has received approval to adopt SDR labels across 10 of its funds.
The Schroder Sustainable Bond fund will become one of the first bond funds to adopt an SDR label, according to the group.
The Sustainability Focus label will be adopted by:
- Schroder Global Sustainable Value Equity fund
- Schroder Global Sustainable Growth fund
- Schroder Global Energy Transition fund
- Schroder Sustainable UK Equity fund
- Schroder Global Sustainable Food and Water fund
- Schroder Multi-Factor Equity fund
- Schroder Sustainable Bond fund
- Greencoat UK Wind plc
The Sustainability Impact label will apply to:
- Schroders Capital Real Estate Impact fund (SCREIF)
- Schroder BSC Social Impact Trust plc
Anna O’Donoghue, global head of product development and governance at Schroders, said: “We are proud to announce our intention to become an early adopter of the FCA’s SDR labels across 10 of our funds, which we believe reflects the integrity and robustness of our sustainable and impact investment approach.
“The labels will help to differentiate our sustainable product range, making it easier for clients who are seeking sustainable outcomes to identify opportunities to invest. We appreciate the FCA’s ongoing collaboration and we continue to liaise closely with them as we work through the regulatory process across other relevant Schroders funds.”
Schroder Social Impact trust adopts SDR label
The Schroder BSC Social Impact trust has adopted the Sustainability Impact label from the FCA’s SDR labelling regime.
The trust was launched in 2020 and invests in social organisations and charities for people in need across the UK. In the past three years, Schroder Social Impact has lost 18.2% on its share price total return, compared to a sector average loss of 4.9%, according to the Association of Investment Companies. It currently trades at a 22.7% discount.
Currently, the trust has £84.1m in total assets, with its top holdings including a charity bond portfolio, Bridges Evergreen Holdings, and the UK Affordable Housing fund.
Susannah Nicklin, chair of the board, said: “On behalf of the Social Impact Trust Board, I am delighted to announce that today the company is adopting the Sustainability Impact label introduced as part of the FCA’s Sustainability Disclosure Requirements. We believe that we are one of the first investment trusts to adopt this label since its introduction. By applying the label, we aim to demonstrate to investors both the rigour of our impact practice and our commitment to transparency.”
Portfolio manager, Hermina Popa, added: “The Social Impact Trust remains deeply committed to making investments targeting the reduction of poverty and inequality. We are proud to have helped positively impact thousands of people while delivering over £200m in benefits for the public through savings to government and households since inception. We look forward to continuing our work delivering measurable social impact for disadvantaged people across the UK.”
Note: This article first appeared in our sister website, Portfolio Adviser.
Victory Hill opts for Sustainability Impact label
Victory Hill has also announced that its trust will adopt the Sustainability Impact label, while also changing its name from VH Global Sustainable Energy Opportunities to VH Global Energy Infrastructure.
This, the firm said, reflects the company’s commitment to achieving sustainability investment objectives, while continuing to target a 10% net and unlevered return.
The company has confirmed there is no change to the investment process.
Bernard Bulkin, chair of the company, said: “The adoption of this label highlights our dedication to transparency and delivering real-world impact, providing investors with confidence in our commitment to sustainability, specifically the energy transition, climate change and air pollution reduction.
“We are confident our investment process and measurement approach are rigorous, enabling us to drive measurable environmental outcomes while delivering sustainable financial returns.”
Baillie Gifford adopts Sustainability Impact label
The Baillie Gifford Positive Change fund has been labelled a Sustainability Impact fund under SDR in a demonstration of the fund’s commitment to sustainability and transparency, the group said.
James Budden, director, distribution and marketing at Baillie Gifford, said: “We support the FCA’s aim of helping customers better understand the key sustainability features of a fund and build consumer trust.
“No changes to the philosophy and process of the Baillie Gifford Positive Change fund were necessary in order to adopt the Sustainability label, which is a testament to our commitment to sustainability, but also gives investors greater clarity and confidence in their investment choices.”
The fund was launched in January 2017 and it has two objectives: generating attractive investment returns, and contributing to a more sustainable and inclusive world. These goals are achieved by investing in a concentrated global portfolio of between 25-50 high quality growth companies.
Further reading:
M&G to adopt SDR label for Positive Impact fund
Two EdenTree funds adopt SDR ‘Sustainability Impact’ label
Ninety One’s Global Environment fund to adopt SDR ‘Sustainability Impact’ label
Opting out
Some groups have opted to drop ‘sustainability’ for fund names instead of trying to comply with the labels including Stewart Investors and BlackRock. Most recently, Legal & General Asset Management (L&G) has decided to remove ‘sustainability’ from three funds that use this term and merged these funds ahead of the SDR deadline.
A spokesperson from L&G commented: “At L&G’s Asset Management division, responsible investing is core to our investment approach and we welcome the UK’s SDR and investment labels regime. We are focused on addressing the ‘naming and marketing’ rules under SDR. We are also committed to exploring how different strategies across our key fund ranges will qualify for sustainability investment labels, thereafter, so that we can continue to meet our clients’ requirements in both their financial and sustainability objectives.
“L&G’s Asset Management division can confirm that it has proposed to merge the Legal & General Future World Sustainable European Equity Focus fund with the Legal & General European Equity Income fund and the Legal & General Future World Sustainable UK Equity Focus fund with the Legal & General Future World UK Equity fund, subject to the passing of an extraordinary resolution by unitholders. Following a review of these funds, a decision was taken that both mergers were in the best interests of our investors.”
