The Schroders Capital Real Estate Impact fund has become the latest strategy to adopt the ‘Sustainability Impact’ label under the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR).
The fund aims to address social inequality in the UK and deliver a risk-adjusted financial return by investing in affordable and social housing, town centre regeneration and supporting increased employment.
Impact funds have been quick off the line to receive labels, as many already produce some of the reporting required. Early in September, WHEB became the first listed equities firm to adopt the SDR ‘Sustainability Impact’ label – which it applies to its FP WHEB Sustainability fund. However, at the time of writing, no fund has adopted the ‘Sustainability Focus’ or ‘Sustainability Improvers’ label.
Andrius Makin, senior portfolio manager at Killik & Co, predicted we will see a firm adopt the ‘Sustainability Focus’ label before the ‘Sustainability Improvers’ label.
To qualify for the ‘Sustainability Focus’ label, a fund must demonstrate that investments are sustainable from the outset. However, a ‘Sustainability Improvers’ strategy must go further. For Makin, identifying assets that have the potential to become sustainable “is not enough”, and funds will need to set short- and medium-term targets for that sustainability journey.
“How firms engage with their investments is central to the labelling regime, and the engagement strategy must help deliver the sustainability objectives of their products,” continued Makin.
“’Sustainability Focus’ funds will need to support companies to remain sustainable. ‘Improvers’, arguably, have a harder job to do. The manager needs to be confident that improvements in a company’s sustainability are achievable while also accelerating their journey towards achieving the end goal. I think there needs to be more clarity on what happens when investments reach the end of that journey. Would they have to be sold? It is not currently clear.
“The sustainability, or potential sustainability, of investments must be measured using a ‘robust, evidence-based standard’. The regulator has provided some examples of what this could be, but they have not been prescriptive. That effectively means there is a first-mover disadvantage. I imagine asset managers are waiting to see what works elsewhere and then adjust their products accordingly.”
In September, the FCA decided to offer “limited temporary flexibility” for firms to comply with the Sustainable Disclosure Requirements’ (SDR) ‘naming and marketing rules’ until 5pm on 2 April 2025, but only in in “exceptional circumstances”.
Portfolio manager implementation
Meanwhile, the FCA announced they would be publishing a policy statement on the implementation of the SDR and labelling package for portfolio management in Q2 2025.
Consultation on the proposal closed in June 2024, with the FCA saying they were carefully considering the feedback to ensure that the regime “protects consumers but also recognises and takes account of any practical challenges that firms may have.”
The proposal would mean applying a broadly similar approach to labelling for portfolio managers as introduced for fund managers to ensure a consistent approach and create a level playing field.
“We are aware that it is taking longer than expected for some asset managers to comply with the SDR and labelling regime and of the potential impact this might have on portfolio managers. This has been highlighted to us in the consultation feedback and industry engagement,” their statement noted.
Last month, Hawksmoor Investment Management announced it had suspended its ‘Sustainable World’ services to new clients, citing uncertainty over the timeframe for when SDR will apply to portfolio managers.
