The terminology used in the promotion of investment funds that aspire to invest in a way that has a positive, or at least not a negative, impact on society has evolved over the decades, but has always had an element of subjectivity.
The earliest iterations of these fund strategies focused specifically on ethical considerations, and pursued policies that excluded companies deemed to be doing harm, from there came funds that focused on specific themes, such as climate, and labels such as sustainability and impact began to appear on fund factsheets.
The first wave of attempts to put a structure around the terminology came with the introduction, within the EU, of the sustainable fund disclosure regulation (SFDR), which awarded funds a number based on their capacity to meet set criteria around sustainability.
Although those rules do not directly apply within the UK, many fund providers used those in conversations with clients here, both because they felt it aided clarity, and because the same funds are marketed both in Europe and the UK.
Now UK policymakers have revealed their own suite of regulations aimed at adding clarity, with the sustainability disclosure requirements (SDR) rules, which asset management businesses will have to begin implementing from this summer.
Jake Moeller, consultant at Square Mile, says he has been “surprised at how little fuss asset managers have made about these rules”, but adds that the impact of the SFDR may have contributed to this, “as it helped them realise what a labelling system for funds can bring, how it can help”.
Ita McMahon, partner at Castlefield, an investment management and advice firm, says the SFDR rules are moving the disclosure level within the industry in a way similar to how labelling on food has increased clarity.
In terms of what it means for clients' conversations with their advisers, she says: “What has traditionally happened is that a client comes to their adviser and says they want to invest sustainably. And when they ask that, they are bringing with them a set of assumptions, and of course the assumptions of each may be different.
"The advantage of a set of guidance is that it helps to frame those conversations."
On the key benefit of guidance existing in this way, Moeller says: “Really what a provider is selling is a skillset, and of course it can be hard to communicate that in a way which is useful, but the guidance helps providers to do that.”
The SDR rules create four categories of funds: sustainable focus, sustainable impact, sustainable improvers, and an additional mixed category.
Sustainable focus is the highest classification, while the mixed category is for multi-asset funds that may have assets drawn from all of the above categories.
Moeller says many of the providers with whom he has been in contact “have learned a lesson” from the rollout of the European rules.
