Last November, the Financial Conduct Authority (FCA) unveiled its Sustainability Disclosure Requirements (SDR) policy statement and investment labels, designed to help consumers effectively identify and compare financial products that are in some way advertised as having ESG credentials. Managers of UK-based investment funds have been able to use these investment labels on their products since 31 July 2024.
WHEB recently became the first listed equities firm to adopt an SDR label – the ‘Sustainability Impact’ label – which it applies to its FP WHEB Sustainability fund. PA Future spoke to George Latham, managing partner at WHEB, to learn more about the filing process, the challenges involved, and whether there was room for improvement.
Before funds were able to adopt the SDR labels, an investor told us the disclosure requirements around the ‘Sustainability Impact’ label specifically were “onerous” and might dissuade fund managers from offering those strategies. What are your thoughts on that and what was your experience of dealing with those requirements?
What made it easier for us is that we’ve been doing this for a long time. We have a 20-year track record focused on investing in solutions addressing sustainability challenges, so it’s a market we’ve played a part in creating and developing. We’ve been using our own impact reporting disclosures during that time – we conducted our first impact report in 2014 – which put us in a strong position to cope with the disclosures related to SDR’s impact label.
We were also very involved with the consultation period, contributing to the FCA’s Disclosures and Labels Advisory Group and writing a white paper on impact investing in listed equities back in 2021, which set out a framework that looks a lot like the framework the FCA now uses for their SDR labels. So, we were very in tune with the way the process was going.
The key part is understanding the difference between the enterprise impact, the impact of the underlying companies we invest in, and then our investor contribution through the way we invest, but also how we engage and manage our investments in the portfolio. Whereas SDR was originally developed as a communication tool, the framework that describes the SDR labels has got us thinking more broadly about our investment objectives and what we’re trying to achieve with the fund.
Of course, it is onerous. But I think the disclosure requirements around each of the labels are onerous generally, not just the ones associated with the ‘Sustainability Impact’ label. However, they’re also consistent with the things we’ve been doing for a long time anyway.
How long do you estimate the process took for you to get the disclosures ready to file your prospectus?
I talk about it being an 18-month process if we were to include the consultation period. But really, we got the policy document at the end of last year with initial preparation beginning at the start of 2024.
We did our original draft of the new prospectus in the first quarter of this year, and then we spent the spring in pre-application conversations with our lawyers and the FCA. Then, once we applied, it was just a question of timing with the FCA. With our application, it took a couple of months to process, which was a bit longer than we’d expected or originally hoped. But this is a principles-based regime, and it was always going to be challenging to turn that set of principles into some kind of reality in terms of prospectus.
In a way, there’s a certain amount of first-mover disadvantage, because there’s a point at which you create the precedent by inking the first one and, as I said, turning those principles into reality. Not that we had to change much in terms of our investment strategy, but it was just about making sure we met all the requirements on the disclosure and criteria side of things, in a way that flowed and made sense to a consumer.
Has the filing process changed any methods, measures or practices you may have to meet disclosure requirements?
Not so much. But what has changed is there’s a clearer front end, and a clearer articulation of the objective and theory of change. This used to be about a page and a half long but is now around 12 or 14 pages long. I suppose you could argue about the amount of detail and specificity versus accessibility and readability, and whether a consumer is actually going to read it. But it does flow through what we’re trying to achieve, the theory of change and how what we do goes toward trying to achieve it. It’s just been a case of trying to get the articulation of that right.
Additionally, it has given us a reason to put some of the methodology around how we go about our investment processes into the prospectus. It had been published elsewhere before but hadn’t previously been in the prospectus. It’s something we’ve been doing in our Dublin fund for SFDR (Sustainable Finance Disclosure Regulation) anyway, so it’s allowed us to bring those two things in line, which we’re keen to do anyway.
Equally, the methodology for how we go about calculating our key performance indicators (KPIs) is now in the prospectus as well, and we’ve thought really hard about trying to get the framework structured more systematically around how we measure our effectiveness in our engagement and our stewardship on the investor contribution side. We’ve slightly changed the framing of it and some of the terms of reference for it, just to make sure it fits all the requirements of SDR, but the basic principle of it was already in place. But some people will probably have to start from scratch with that.
The FCA has just announced an extension for firms intending to adopt a fund label to comply with the naming and marketing rules. Did that surprise you? And could this be to ease the pressure on the FCA in reviewing a large number of filings as much as it is for asset managers?
There’s often a lot demanded of the FCA, and with this, there are a lot of people trying to get through the gate and get into position. For us, because we’re not changing anything beyond the prospectus, we didn’t feel the need to provide a long notice period. Some funds, however, are going through a significant change, and they may need to give their investors 60 days’ notice – which means the internal deadline would be nearer the beginning of October. So, given how complex the situation has been, and how long it’s taking everybody to get to grips with it, the extension eases some of the pressure.
The worry was that, if the FCA stuck with their original deadline of 2 December, funds and fund ranges concerned about not being able to be compliant could decide to just give up on the process early or be forced out of the process. So, this is a sensible move because, so long as people are still in the process – people aren’t afforded the time to procrastinate, they have to get their application in by 1 October still – they are allowed to breathe and take a sensible approach to make sure they file for a label correctly.
Did you face any other challenges during the filing process?
One thing that did add a level of complexity was that there are so many other actors involved, not just the FCA. It all goes through the policy team, then the authorisations team, then the supervisions team, etc, and they’ve all got to translate what is written into what it means for them. But then it also has to go through lawyers and the ACD (authorised corporate director), and there is a whole range of different parts of the communication chain where there are chances for the message to get lost in translation. So, that presented a big communication challenge, and a key part of managing that was always keeping lines of communication open.
