Fidelity Confirms Sustainable Investing Framework Shift
Asset manager creates three new fund categories to provide greater clarity amid fragmented and evolving regulatory landscape.
Fidelity International has made revisions to its sustainable investing framework to adjust to a changing ESG regulatory landscape, aiming to provide investors with greater transparency on its funds.
Specifically, the asset manager has introduced three high-level categories – ‘ESG Unconstrained, ‘ESG Tilt’, and ‘ESG Target’ – to help complement its overall investment approach.
“The revised framework will enable us to more effectively demonstrate how our funds are meeting their respective ESG goals or requirements,” Jenn-Hui Tan, Chief Sustainability Officer at Fidelity, told ESG Investor. “We believe this balances a robust approach to sustainability with a flexible [one] that can accommodate different investment styles, asset classes and client preferences.”
The integration of sustainability into investment research and portfolio construction is part of Fidelity’s process to identify the drivers of long-term value creation, Tan explained.
‘ESG Unconstrained’ is comprised of funds previously labelled as Article 6 under the EU’s Sustainable Finance Disclosure Regulation (SFDR) products, with no change in requirements or exclusions from Fidelity.
Meanwhile, ‘ESG Tilt’ applies to funds previously grouped under Article 8 of the SFDR, and which aren’t part of Fidelity’s Sustainable Fund Family (SFF). As part of the changes, these funds will switch from meeting an absolute test – which requires more than 50% of assets to have favourable ESG characteristics – to a relative test using a ‘better-than-investment-universe’ approach. This, Fidelity argues, will help to better demonstrate the promotion of ‘E’ and ‘S’ characteristics.
‘ESG Target’ is the most robust of the three categories, and applies to Article 8 and Article 9-classified SFF funds. Requirements for these funds have changed from a one-size-fits-all SFF baseline constraint of more than 70% of characteristics being favourable to ESG, to particular investment approaches, namely ‘ESG Leaders’, ‘Sustainable Thematic’, and ‘Impact’.
Under the SFDR, Article 8 refers to funds promoting environmental and/or social characteristics, while Article 9 covers funds with a sustainable investment objective and mandates that all of their holdings must be sustainable and meet the ‘do no significant harm’ standard.
“We have designed the framework to take account of evolving ESG regulations globally such as SFDR, the UK’s Sustainability Disclosure Requirements (SDR), and local fund rules in Hong Kong and Singapore,” said Tan. ”The aim is to enhance clarity and transparency for clients on how ESG is being considered for products within Fidelity International’s sustainable investing framework.”
Regulatory proliferation
The changes to Fidelity’s sustainable investing framework arrive amid increased regulatory attention to the sustainable investing space.
Alignment between requirements, in particular, has become an increasingly pervasive issue – with both asset managers and regulators aiming to bring further clarity. But concerns persist among investors absence of cohesion risks fragmentation.
Chris Fidler, Head of Global Industry Standards at the CFA Institute, warned that asset managers’ creation of bespoke frameworks and terminologies increased the risk of confusion in the marketplace.
“The fact that asset managers are developing their own fund categories and EU regulators are considering revisions to SFDR to formally define product categories shows that there is still a need for a more effective and rigorous sustainable fund classification system,” he added.
Sarita Gosrani, Director of ESG and Responsible Investment at bfinance, also stressed the importance for investors to avoid relying on fund labels and regulatory designations that do not help to confirm a robust ESG approach.
In a bid to clarify the regime, last month, the European Supervisory Authorities’ (ESA) proposed a revamp of the SFDR. However, lawyers flagged concerns that the proposed changes could, in fact, further complicate the regime by making it more divergent from other jurisdictions – thereby creating disruption for fund managers.
The ESA’s move followed a three-month consultation last year, after which the European Commission collated feedback on the effectiveness of the SFDR to date. In May, a summary report showed no clear consensus on potential improvements among industry members.
As such, the commission proposed to either design and implementing new criteria that would more closely align with UK SDR fund labels, or to formalise Article 8 and 9 as product categories.
“It makes sense for asset managers to adapt their frameworks over time, in line with market expectations and new regulations,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics. “As long as regulatory regimes, definitions and classifications continue to differ across jurisdictions, asset managers will also use different frameworks. The frameworks they create also attempt to bring consistency across jurisdictions.”
Last year, the UK’s Financial Conduct Authority added a ‘Sustainability Mixed Goals’ label to its the SDR regime. Firms will be able to use some of the labels from 31 July, before the regime is applied in full on 2 December alongside new anti-greenwashing requirements.
From then on, asset managers will need to fulfil the requirements of one of the four sustainable labels if they want to use words such as ‘ESG’, ‘green’, ‘sustainable’ or ‘impact’ as part of their fund strategy.
According to Morningstar, an estimated 300 UK open-and closed-end funds are likely to opt for one of the four SDR labels by the end of this year.
“Whether it’s through their product development activity or marketing efforts, we’re seeing increased clarity being provided by asset managers,” said Bioy. “This has been driven by regulations.”
The post Fidelity Confirms Sustainable Investing Framework Shift appeared first on ESG Investor.