When those SFDR rules were introduced, the category designed for the most sustainable products was article nine, and Moeller says many providers rushed to classify their products in that way, and subsequently had to revise this, and become article eight instead.
Malcolm McPartlin jointly runs the Aegon Global Sustainable Equity fund; as this mandate is domiciled in Dublin, it is governed, even for UK-based clients, by the SFDR, rather than the SDR rules.
His fund is article eight, which he believes equates to the SDR’s “improvers” category.
He says he preferred his fund not to seek the article nine classification at the time, as he was unsure the mandate would warrant it, and he did not want to see his fund subsequently downgraded.
In terms of how each of those categories work in practice, McMahon says: "The 'focus' category is for funds that can demonstrate the holdings are sustainable now, the improvers category is for holdings that have a clear plan to get to sustainability, while the impact category is for funds that are able to demonstrate a positive change on society."
The flexible category applies mostly to multi-asset strategies.
Proof of concept
Moeller says the SDR rules require providers to show “robust and credible” evidence that their products conform to the labels above, but adds that there are no specific guidelines around what this evidence should consist of or how it is presented.
He says this non-prescriptive approach means “some of the providers are good to go from day one, but others less so. But I don’t think the flexibility prevents them from doing meaningful reporting”.
McMahon’s firm is at the coalface of this, being providers.
She says that while the EU regulations have created an entire taxonomy, “which is like an encyclopedia, here it is a lot freer and a lot more down to the fund manager. It is essentially a self-certification scheme.
"The funds we have, we are asking each manager why they are in each category, and we have a product in the flexible category, which is a fund of funds. For those, of course we are to an extent relying on external managers, and so for that we think it's best the product be in the flexible category."
Eleanor Fraser-Smith, head of sustainability at Victory Hill Capital Partners, says: “There has been a proliferation of disclosure regulations in recent years which has led to more transparency. However, many of these disclosures are complex and technical, not very accessible and, if they are read, have done little to build trust in the sector.
"ESG teams, comms teams, PR teams, IR teams often don’t align on ESG communications. Additionally, in a world of miscommunication and social media, firms cannot control the narrative and transparency commitments can backfire. That’s why regulations that focus on fair, clear and not misleading communications are vital.”
