Ninety One Urges Accelerated SDR Approvals
The investment manager’s environment fund joins select club to receive Sustainability Impact label, but hundreds await FCA rubber stamp.
Ninety One said it hopes the UK Financial Conduct Authority (FCA) can expedite the approval process for its Sustainability Disclosure Requirement (SDR) labels for funds under its naming and marketing rules.
Having reached the standards required to obtain a label, the global investment manager also encouraged peers to “keep trying” in order to support the flow of capital to low-carbon and sustainable investment opportunities.
Finalised in November last year, the SDR’s naming and marketing rules for green funds mean UK-domiciled products wanting to use terms such as ‘sustainable’ and ‘impact’ in their names must comply with the terms and conditions of one of four SDR labels – ‘focus’, ‘improvers’, ‘impact’ and ‘mixed goals’. More than 1,200 funds in the UK were expected to be affected by the SDR’s rules, but the number of approvals only recently passed ten.
Ninety One’s Global Environment Fund was one of the three funds given a label during the last week, nudging the total number of fund labels past ten, and will adopt the Sustainability Impact label on 1 December. The Sustainability Impact label indicates to investors that a fund invests with an aim to achieve a predefined, positive and measurable environmental and/or social impact.
The fund, launched in 2019, focuses on identifying businesses whose structural growth is driven by decarbonisation across three key pathways: renewable energy, resource efficiency and electrification. ‘Environment’ is one of the terms in fund names for which the FCA explicitly demands a label under SDR.
Attaining a label was a challenge according to Deirdre Cooper, Head of Sustainable Equity at Ninety One and the fund’s co-manager, who described the process as “very lengthy” with Ninety One’s product team having to answer “hundreds of questions”.
“I understand the desire to raise standards and to ensure that sustainable products are doing what the ultimate individual investors expect them to do,” Cooper told ESG Investor, “but I would also hope that this process across the industry can become quicker, allowing for more labelled funds and more money to flow into sustainable areas.”
A long queue
The SDR rules are intended to improve transparency, bolster reporting and limit greenwashing related to sustainability-focused investment products through the introduction of labels and guidance.
Firms have been able to apply to use the labels since the end of July, with the requirements due to come fully into effect on 2 December. However, due to the FCA finding the label application process was taking longer than expected the authority has offered asset managers temporary flexibility to comply with the naming and marketing rules under SDR until 2 April next year.
A report published in May by the Investment Association (IA) forecast that two-fifths of firms with UK domiciled funds intended to apply a sustainability label to at least one of their funds, with the majority doing so before the end of the year. By the end of August, an estimated 400 funds had applied for labels under SDR.
“Like the rest of the industry, we are disappointed to see the small number of funds that have been labelled so far,” said Cooper. “Ultimately, we need to channel more capital into sustainable finance, and there’s no place where that need is more acute than climate.”
The UK Sustainable Investment and Finance Association has called on the FCA to offer greater transparency on the overall number of fund approvals, the provision of active support for industry and the widespread sharing of good practices to foster a high standard across the sector.
Earlier this month, the FCA issued examples of good practice, looking to answer calls to support asset managers in preparing disclosures for funds using these labels.
Impact takes the lead
At the start of the year, Morningstar had expected the focus label to account for 46% of SDR fund labels, while impact was expected to be the least prominent at 11%, a prediction shared by the IA. So far, however, a high proportion of approvals have been for impact-labelled funds.
Natixis Investment Managers’ AEW became the first asset manager to be approved by the FCA for an SDR label in July, followed in September by WHEB Asset Management, both adopting a Sustainability Impact label.
UK-based EdenTree Investment Management confirmed two of its funds will have the Sustainability Impact label earlier this week, becoming the first firm with more than one SDR labelled fund.
Similarly to Cooper, WHEB described the process of attaining an SDR label as “arduous”, taking five months to agree changes with the FCA.
Despite the current challenges involved in the application process, Cooper welcomed the “very high standard” the FCA was applying to the labels and urged others to “keep trying”. “The world needs more sustainable investments [and] climate action is more necessary than ever before,” she added. “That structural growth will likely manifest itself over the long-term, and that presents an interesting opportunity.”
Ninety One, which is based in both London and South Africa, has £129.3 billion (US$164.4 billion) in total AUM, with the Global Environment Fund drawing in US$774.8 million of investment by the end of October.
The firm said investing in decarbonisation offers investors leverage for long-term structural growth. According to Cooper, the fund can help hedge transition risk held elsewhere in a in a broader multi asset portfolio.
The Global Environment Fund’s annual impact report noted improvements in investee companies lowering emissions intensity. This included 87% of portfolio firms reducing Scope 1 and 2 emissions intensity year-on-year, 92% of those reporting on Scope 3 emissions reducing their intensity, and 69% increasing their avoided carbon avoided year-on-year.
Ninety One declined to comment on how many of its funds are affected by SDR and how many of the products are in the process of attaining a label.
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