Do investors need a new category for green funds under FCA’s latest SDR proposals?
Many ‘traditional’ green funds would not qualify as sustainable vehicles under new FCA proposals, warns Miranda Beacham, head of ESG equities and multi-asset at Aegon AM
The FCA’s Sustainability Disclosure Requirements (SDR) consultation, aimed at ‘anti-greenwashing’, ensures investors that all funds' sustainability-related claims are ‘clear, fair and not misleading’, according to Britain's financial services watchdog.
However, some in the industry believe the potential impact of certain aspects of the proposals on green funds need to be addressed urgently.
In many ways the so-called 'ethical' funds were the original ESG funds and are still popular with investors who have a strong desire to avoid being associated with certain products and activities, mostly pension funds.
Such funds use a range of ethical screening criteria to exclude investing in companies that for example test their products on animals or impact the environment through using hazardous chemicals among others.
But under the current measures proposed in the SDR consultation, which would see the introduction of three sustainable investment labels; sustainable focus, sustainable improvers, and sustainable impact, many ‘traditional’ ethical funds would not qualify as sustainable funds, according to Miranda Beacham, head of ESG equities and multi-asset at Aegon Asset Management.
"By utilising exclusion screens ethical funds invest in companies that are by definition doing good with strong sustainable characteristics, but as that is not their primary objective, they do not fit in to any of the proposed buckets of funds," Beacham explained.
The FCA is said to be considering to add a fourth SDR category, for these ethical funds which use exclusion screens to avoid companies which are involved in potentially harmful practices.
Beacham believes "there is a space for a fourth category which would enable ethical funds to qualify for a label. Such a category would be for funds with meaningful exclusions applied to their holdings universe."
She stressed "this excludes companies that do not meet its criteria in terms of animal welfare and the environment, or are involved in the following; military, nuclear power, political donations, genetic engineering, gambling, alcohol, tobacco, pornography, banks or oppressive regimes.”
Beacham highlighted there is precedence for such a category, as seen with the French SRI label which requires at least 20% exclusion materiality threshold.
“So, I believe something meaningful and with a good process backing it up would be a workable solution to this problem,” she noted.
“If there is not a new label for ethical funds to qualify, the currently drafted anti-greenwashing rules will not allow providers to discuss the ESG credentials of their products and significantly impair client reporting and marketing of these funds," Beacham continued.
“Simply put, it does not make a lot of sense that a fund investing in fossil fuel industry is permitted to have a label and yet funds that, by process of elimination, invest in cleaner companies are not deemed worthy of one."
For this reason, Beacham urges the FCA to "reconsider their qualification definitions or risk throwing the baby out with the bathwater."