From today (31 July), fund providers can adopt fund labels outlined in the final proposals of the Financial Conduct Authority’s (FCAs) Sustainability Disclosure Requirements (SDR). These are: Sustainability Impact, Sustainability Mixed Goals, Sustainability Focus and Sustainability Improvers.
While some ESG-focused groups are expected to become early adopters of SDR’s labels, welcoming the overarching goals of SDR and the fund labels the FCA has developed, many others have found filing for a particular label challenging given the depth and breadth of data and reporting required.
PA Future asked professionals in the sustainable investment space about their reflections on SDR, as well as what the next steps could look like for investors, with the deadline for naming and marketing requirements for a labelled fund set for 2 December.
SDR will be ‘an iterative process’
Jacob Kasaska, research associate, MainStreet Partners
People are obviously concerned about timelines. One of the things that we’ve encouraged asset managers to do is to speak to the FCA as soon as they can.
They’ve been open for discussions and are working with asset managers to establish whether or not they think what an asset manager is proposing makes sense and is aligned, obviously not giving any clear guidance or anything more than in the policy paper.
I think the initial estimated number of funds that will adopt a label from the outset were between 200 and 300. I’d probably be quite surprised if that ends up being the case. You’ll probably be able to tell a lot about the culture of those firms that become early adopters, and I think they’ll be firms that are sustainable by nature and feel that they’re well placed to address the regulations and want to be there first.
Whereas there are going to be wider and broader asset managers who have upwards of 30 strategies that will have to take a more tailored approach and not go the whole hog and try to get everything labelled. So, I think it’ll definitely be an iterative process, and we’ll see a change over the next six months, and then again over the six months after that, and so on so forth. It’ll come down to flows and what the environment looks like from a commercial perspective.
Bhavik Parekh, research associate, MainStreet Partners
Beyond labels, I’ve spoken to a lawyer who is advising funds who said that most of the work they’ve been doing is not on the labels, but on the funds that promote ESG.
If you think about a fund group with, for example, 30 funds that are in scope, maybe only two or three of them will have a label. That still leaves 27 or 28 funds where they’re going to have to produce new disclosures over the next four or five months.
So, they will need to spend a lot of time over the next few months getting that all of that together, which may end up being a lot more work than trying to get a label, in terms of man-hours spent.
So, of course, there’ll be those getting labels, but I think most of the more vanilla asset managers will spend most of their time over the next few months on documentation and that kind of stuff.
Smaller UK firms could struggle to analyse their portfolios for a label
Emil Stigsgaard Fuglsang, COO and co-founder at Matter
The implementation of SDR is a positive step for the UK fund management industry, but it also presents two tall hurdles many smaller firms must now overcome. Any fund manager who wishes to adopt the labels must develop frameworks for classifying investments as sustainable, as well as thoroughly analyse their portfolios to ensure at least 70% of investments align with the fund’s objectives.
While many global investment managers already have these competencies in place thanks to the requirements of other regulations, the majority of smaller British firms do not.
This means they face the challenge of accurately defining sustainability in their investments and implementing data and analytics solutions to track and document their performance against these definitions at the fund-level. This will be no easy task, but those who take action now will be best prepared by the 2 December deadline.
‘Don’t delay’
Abi Reilly, funds practice lead, Bovill Newgate
It’s understandable that firms are just beginning to source the appropriate data for SDR now. However, with reporting deadlines coming up soon, they must not underestimate the time and resources needed to prepare the necessary reports.
The biggest challenge lies in obtaining the required data and determining if it’s collectible. If not, how will they fill these gaps? Will proxy data need to be used? It’s crucial for fund and asset managers to engage with their portfolio companies now, and ask the relevant questions – for example, where a fund has a focus on environmental sustainability does the company measure its carbon footprint and its water wastage and where a fund has a more social equality focus, does the company have appropriate diversity and inclusion policies and how does it deal with vulnerable employees/customers.
Firms need to establish a robust standard and identify the data needed to support it. These questions must be asked now to ensure the necessary data can be produced. Over the next few months, firms must work collaboratively with companies that struggle to provide data, rather than cutting them off. Fund and asset managers should use their stewardship strategies to work with portfolio companies to come up with a reporting plan.
Although the reporting requirements may be complex, our message is simple: don’t delay. If you’re aiming for a label or will be drawn into the regime by marketing funds to retail clients using so-called ‘green’ language, you will need to be in a position to make the relevant disclosures. Even if your focus is only on professional investors and you decide not to use a label you will still need to substantiate any claims made in investor marketing documents in order to comply with anti-greenwashing regulations. Deciding on what data you need, gathering it efficiently and supporting your portfolio companies to improve their data over time is the key to successful reporting and compliance.
A ‘significant step’ to address transparency concerns
Martina Macpherson, head of ESG product strategy and management, SIX Financial Information
With specific product labelling rules coming into force, UK firms of all sizes need to prioritise adopting these now ahead of the mandatory deadline at the end of this year. Challenges for asset managers remain to categorise funds in line with the UK’s labelling regime, and to align them with the EU’s fund labelling rules introduced by ESMA earlier this summer.
Overall, ESG fund labels represent a significant next step to address transparency and greenwashing concerns.
Meanwhile, the mounting public and regulatory attention surrounding sustainable investment demands firms to use the most reliable, legitimate and timely data to inform their decisions.
