In Focus: Values-based investing  

What the FCA's sustainability disclosure regime means for advisers

  • Describe the FCA's new rules on sustainability disclosure and investment labels
  • Communicate who is affected by the SDR rules
  • Explain advisers' obligations under the SDR rules
CPD
Approx.30min

Advisers should familiarise themselves with the four labels:

  • Sustainability focus.
  • Sustainability improvers.
  • Sustainability impact.
  • Sustainability mixed goals.

Sustainable focus: Funds investing mainly in companies that are already environmentally and/or socially sustainable, determined by a robust evidence-based strategy.

Article continues after advert

This is really about looking at those companies that are being managed well and meet a credible standard of environmental and/or social sustainability or align with specific themes. 

The FCA reinforces the requirement to have at least 70 per cent of assets invested in accordance with its label.

The label has to prove to be sustainable through its KPIs by requiring other assets within the fund to avoid conflict with the sustainability objective. 

Sustainability improvers: Funds that invest mainly in assets that may not be sustainable now, but have an aim to improve sustainability for people or the planet over time with short and medium-term targets. 

Here, for example, might be companies that have committed to better business practices and working conditions in line with industry standards or, say, a power generation company that uses fossil fuels but aims to transition to renewables.

Arguably there is a huge amount of benefit in the actual transition towards better environmental or social outcomes.

This is especially the case if one believes that targeted and meaningful active ownership activities, with companies that need to change, is more beneficial than simply divesting and ignoring companies that are not deemed sustainable today. 

Sustainability impact: Funds that invest in solutions to sustainability problems, with an aim to achieve a positive impact for people or the planet.

In this case, funds will invest in the companies that are providing specific solutions to particular environmental or social problems and are as a result going to drive the change, in terms of the products and the services that people are using on a day-to-day basis.

Fund managers must specify a theory of change by setting out how they expect these companies to make a positive impact and providing a method for measuring the impact.

Products that may opt for this label could aim to achieve a pre-defined, measurable impact regarding a particular environmental and/or social outcome.

For instance, investing in a company that produces solar panels and solar technology can be deemed to be positive impact as it directly avoids CO2 emissions that would otherwise have been emitted in the long term.  

Sustainability mixed goals: Funds that invest in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet.