In recent years, many asset managers have launched sustainable investment products, or portfolios, aimed at investors who not only seek financial returns, but also wish to take environmental or social considerations into account.
Today, however, terms such as "sustainable’" ‘ESG’, ‘impact’ and ‘transition’ have become over-used, and such claims have not always been reflected in the management and composition of portfolios.
To combat misleading claims (i.e. greenwashing), regulators have issued stricter naming rules. The Financial Conduct Authority (FCA) in the UK has published a set of Sustainable Disclosure Requirements (SDRs) and Investment Labels that list the criteria an investment must meet in order to use one of the four recognised labels starting in July 2024:
Sustainability Focus - Products must invest at least 70% in sustainable assets.
Sustainability Improvers - Products must invest at least 70% in assets in which sustainability is expected to improve over time.
Sustainability Impact - Products must invest at least 70% in assets with a real positive impact in terms of sustainability and social responsibility.
Sustainability Mixed Goals – Products must invest defined proportions in the 3 aforementioned strategies.
The European Securities and Markets Authority (ESMA), the EU agency that regulates and supervises financial markets, has published guidelines on the use of ESG-related terms in product names. The use of “Environment”, “Impact”, “Sustainability”, “Transition”, “Social”, “Governance” and other related terms will be subject to the following conditions:
- 80% of investments should respect environmental or social characteristics, or aim to achieve a sustainable objective.
- The investment policy must include exclusions in line with the Paris-Aligned Benchmark (PAB) and/or the Climate Transition Benchmark (CTA), depending on the terms chosen.
- Specifically, the use of the term “Sustainability” will entail a commitment by the fund to invest “significantly” in sustainable investments in accordance with the Sustainable Finance Disclosure Regulation (SFDR).
These guidelines will come into force on 21st November 2024, with a 6-month transition period for existing funds.
The difficulty will lie in correctly interpreting and reconciling these criteria, without taking into account the potential challenge to the SFDR classification of products.
These regulations and guidelines will lead to name changes for certain funds, and possibly even an adaptation of their investment policies.
CACEIS provides clients with analytical tools helping them to verify the compliance of investment products with the new investment limit regulations and product naming conventions.
