By Jane Wadia, Head Of Sustainability, Core Products & Client, AXA Investment Managers
Let’s first consider the facts. One of the key components of SDR is fund labelling, with qualifying asset managers having been able to use the four new sustainability labels for funds – Focus, Improvers, Impact and Mixed Goals – from 31 July 2024.
First and foremost, the rules are aimed at driving up trust and transparency in the market for sustainable investment products. But while the immediate impact on institutions has been minimal, being predominantly focussed on retail investors, the long-term implications for sustainable investing could be much broader.
Of course, between net zero objectives and ESG disclosure and reporting, we must acknowledge that pension trustees already have a lot to juggle in the realm of sustainability.
It’s therefore no surprise that it’s too early to expect strong interest in SDR has until this point been addressed. But for DC schemes in particular, the regime could become of increasing importance as they look to further diversify their allocations to UK-domiciled funds and pressure builds for them to demonstrate competitive edge to members who are keen to prioritise sustainability alongside returns.
Should pension funds be sceptical of a fund without a label?
Not at this current juncture. Research from the Investment Association (IA) conducted between March and April 2024 regarding SDR adoption found that just under 40% of UK fund managers had no plans to introduce SDR labelling, with 7% believing they would never get one. This means the proportion of UK funds with a label is likely to be a relatively small minority.
Consumer demand for labels will no doubt grow as the benefits of the framework become clearer and triggers wider adoption across the industry. However, an often-overlooked aspect of SDR is that, alongside the labels, the FCA has established broader guidelines to categorise funds still incorporating ESG and sustainability as Sustainable ‘non labelled.’ Funds with this classification won’t have met the criteria for specific labels but will be viewed as better aligning with the regulator’s definition of sustainability.
This is significant for pension schemes, as it means that if they are investing in a fund for ESG reasons, then the absence of a label should not give cause for concern. At this early stage, the reasons a fund might not have one are manyfold. However, in line with fiduciary duty schemes need to be certain that their investments continue to support their ESG and sustainability objectives.
To maintain this certainty, they must keep a firm focus on how managers are approaching various aspects of ESG in a way that represents the scheme’s interests and helps create a more sustainable world for the benefit of their members.
Where should schemes be focussing their attention?
Identifying managers who offer concrete investment solutions with clear goals around issues such as climate change, biodiversity, social progress is a good place to start.
Biodiversity is a particularly topical and critical area right now, with the World Economic Forum reporting that 50% of world GDP relies on a medium-to-high functioning biodiversity. Particularly for schemes with net zero commitments, investing in solutions that support biodiversity loss needs to be considered, so it is important their managers offer access to these. Schemes should also be challenging managers for concrete evidence that they actively engage on biodiversity-related topics as part of their stewardship activities.
Focussing on ESG reporting is also key. It is with those client needs in mind that we have rolled out a comprehensive new ESG report containing the most asked for metrics including but not limited to climate. More recently we have gone even further by including, as part of our standard reporting, an engagement and voting report at portfolio level. It means our clients can see how our engagement activity feeds through to their assets and I have been delighted with the very positive feedback we have received to date on it.
Specific approaches will vary by firm, but what schemes really want to see is a manager leveraging this kind of analysis within a range of metrics they as a client can monitor to see how things are going – from ESG scores to climate colouring scores which assess where companies sit on their trajectory towards net zero.
Ultimately, pension schemes should focus on moving from analysis to action and consider how SDR may become over time another item in the toolkit as they work to build robust and sustainable portfolios focus for the benefit of their members.
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