By Jaid Longmore, Responsible Investment Associate Consultant at Hymans Robertson
While the EU’s focus has been on disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR), the Financial Conduct Authority in the UK has taken a different approach, recently releasing its Policy Statement on Sustainability Disclosure Requirements (SDR). This uses an investment labelling regime for sustainability products.
At the core of these regulations is the mission to combat greenwashing, by fostering better transparency for investment vehicles that promote themselves as sustainable. However, these divergent approaches make it difficult to align regulatory standards succinctly. To add to this, the EU launched a consultation in September 2023 to seek feedback on SFDR and whether it’s ‘fit for purpose’.
Regardless of the various regulatory regimes, we believe that investors should form a view on what credible sustainability is – and look to continuously meet best practice as opposed to minimum regulatory requirements.
This is echoed by the regulation itself, as the intent of SFDR is to focus on disclosure. It’s up to the investor to assess whether a particular fund provides the sustainability characteristics they’re looking for.
So, what is ‘good’ sustainability? We define good practice across four key areas:
Sustainable objective
The sustainable objective of the fund should be part of the investment objective, be clearly stated, with transparency around the approach and expected sustainable outcome. While the focus might be on a single E or S issue, we believe consideration should be given to the range of E, S and G issues to ensure that trade-offs are properly acknowledged. Investments shouldn’t have a net negative impact on society or the environment in pursuing the sustainable objective.
Methodology and data sources
There should be a clear method to define the sustainable investment universe, with transparent and evidence-based methodology that’s independently verified and tested. To define this universe, multiple sources of ESG and/or climate data should be used, with effective processes in place to challenge the efficacy of data and judge materiality. There should be consideration of both backward and forward-looking metrics, and data collection should be reviewed continuously to capture evolving technological advancements. This need not exclude sustainability laggards if there are criteria that relate to future improvements.
Reporting and transparency
Progress against the sustainable objective should be regularly monitored using predetermined, decision-useful key performance indicators (KPIs). Reporting against the sustainable objective should be comprehensive and supported by more detailed commentary where needed.
Stewardship and engagement
The stewardship policies and practices of the asset manager should be demanding of change, with a well-resourced stewardship team and structured process of engagement. The asset manager should be able to share examples of engagement that have led to real-world change , with a clear escalation approach in place. Engagement shouldn’t be reactive to emerging ESG risks, but rather proactive in driving positive sustainable outcomes. Engagement and voting activity (where relevant) should be reported at the strategy level and clearly aligned to the sustainable objective of the strategy.
These four areas define clear criteria for sustainable products, and it’s our view that while both EU and UK regulations are useful guidance, they shouldn’t be taken at face value. Investors should test the sustainability credentials of their products and determine whether these are aligned with their own requirements while meeting best practice.
|
