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Commentary Impact Investment

WHEB’s view on the FCA’s proposals for Sustainable Disclosure Requirements (SDR)

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In October the UK’s Financial Conduct Authority (FCA) published a consultation paper setting out their proposals for a new regulatory instrument to govern the use of certain terms in the names and marketing of investment products.1 While this was perhaps not the most compelling topic to discuss with family members over Christmas dinner, it nonetheless represents, in our view, the greatest ever shake-up of the UK’s sustainability investing market.

The need for an SDR regime

It is important to state at the outset that WHEB remains very supportive of the principle of FCA action in requiring more rigour in the use of key terminology in sustainability investing.2 Key terms like ‘sustainability’, ‘sustainable’, ‘green’, ‘ESG’, ‘responsible’ and ‘impact’ have become much used – and abused – and the FCA is right to regulate the use of these terms. Done in the right way, the regulations will ensure that these terms have validity, represent something distinct and meaningful that supports the transition to a more sustainable economy and that ultimately will enable consumers to navigate the sustainability investing market effectively.

WHEB is also very supportive of most of the proposals contained in the consultation paper which we think are a sound basis for building transparency and trust in sustainable investment products. However, there are some critical aspects where we believe the proposals would have the opposite impact to what the FCA intends and actually reduce transparency and make the market more confusing for consumers.

The sustainable impact label

The key area of disagreement for us is in the definition of the sustainable impact label. The vast majority of WHEB’s investors invest with us because they want to put their capital into businesses that are providing solutions to critical social and environmental problems, and, almost as important, they do not want to put their capital into businesses that are contributing to these problems.  It is this enterprise contribution – the positive impact of the companies that we invest in – that is central to our clients’ investment objective.

The current proposal for the sustainable impact label however does not focus on the enterprise contribution at all. Instead, it is based on the precise and direct measurement of the contribution that the investor makes through their engagement with companies, their influence on asset prices or on decisions to allocate capital to underserved markets. We recognise the distinction between the enterprise contribution and the investor contribution and believe both are important.3 But by focusing on the investor contribution in this way, the FCA is seeking to redefine impact in a way that does not reflect current market practice or understanding and contradicts how this term has been defined elsewhere.4

In our view, the current proposals will dramatically reduce the size and scale of the impact fund market in the UK. They will create a label that will only be useable by illiquid, unlisted and often sub-market rate of return products. Consequently this label will be largely irrelevant to the retail market. What’s more, many strategies that currently define themselves as impact will likely be forced to use the ‘sustainable focus’ or ‘sustainable improver’ labels, conflating different types of strategies under a single label. The result will be reduced transparency and consumer choice and increased consumer confusion – the opposite of what the labels are intended to achieve. 

'Computer says no'

We are conscious that just objecting to something is not very helpful. Fortunately, we believe that some relatively minor tweaks to the label definitions would align the FCA’s proposals with the market and drive the higher standards the market desperately needs.

Market participants have already categorised sustainability investment strategies into three broad types:

1)     strategies that invest in companies or assets with leading standards of social or environmental sustainability including for example companies that have already aligned or have credible, validated strategies for aligning with the Paris Agreement.

2)     strategies that invest in companies or assets that aim to deliver measurable improvements in the standards of social or environmental sustainability of those assets including for example companies that are not aligned with the Paris Agreement.

3)     strategies that invest in companies or assets that provides solutions to critical social or environmental problems and that have an explicit objective to achieve a positive measurable contribution to these problems.

The FCA’s labels should mirror this structure with the ‘sustainable focus’ label covering (1), ‘sustainable improvers’ as (2) and ‘sustainable impact’ as (3). But the FCA should also go further and drive higher standards by requiring investment managers to provide clearer reporting and documentation to underpin their claims to each label. The current proposals do this very well in our view.

Pragmatism in portfolio management

Perhaps one of the most important implications for advisers, wealth managers and retail consumers, is the proposal for model portfolios, fund of funds and pensions products that build diversified portfolios.  Under the current proposals, portfolio management services can only use a label if 90% or more of the value of all constituent products in which they invest qualify for the same label. 

We think this threshold is unworkably high. It does not, for example, account for the need to hold other asset classes such as government bonds and cash or equivalents, which are unlikely to qualify for the labels.  In combination with the 90% rule being restricted to a single label, it would likely lead to very few portfolio management services being able to use a label, and those that do becoming very narrowly based in a way that does not provide appropriate diversification for consumers. 

Again, we think there is a relatively simple solution.  We suggest reducing the 90% hurdle to 70% and allow mixing across labels for portfolio management services to use a broader ‘sustainable’ label, combined with increased transparency on the exposure to the discrete fund labels contained within.  This would also allow the regulations to be extended consistently to include pensions products, which are currently out of scope.

The consultation

There are other amendments that we plan to propose in our response to the consultation paper which we will be publishing on our website once it has been finalized. In the meantime, we strongly encourage UK market participants to respond to the consultation which runs until 25th January. WHEB stakeholders who are keen to discuss any of the points raised in this blog or in the consultation are very welcome to contact Seb Beloe at seb.beloe@whebgroup.com

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1 Financial Conduct Authority, Sustainability Disclosure Requirements (SDR) and investment labels Consultation Paper CP22/20, October 2022 (https://www.fca.org.uk/publication/consultation/cp22-20.pdf)
2 WHEB for example published a blog supporting the FCA’s ESG and sustainable investment principles in July 2021 https://www.whebgroup.com/news/wheb-responds-to-the-fcas-new-esg-and-sustainable-investment-principles and a similar response following the FCA’s ‘Dear Chair’ letter https://www.whebgroup.com/assets/files/uploads/20210723-response-to-fca-dear-chair-letter-final.pdf  
3 For example see WHEB’s white paper ‘Impact investing in listed equities – WHEB’s perspective’ (https://www.whebgroup.com/assets/files/uploads/20211014-impact-investing-in-listed-equtities-whebs-approach.pdf)
4 For example the Global Impact Investing Network (GIIN), the International Finance Corporation (IFC) and most recently the European Securities and Markets Authority (ESMA) all define impact based on the intention of the investor to have a positive impact and the measurement of positive impacts and outcomes.

Related

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Impact Fund, WHEB Sustainable Impact Fund or WHEB Environmental Impact Fund may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance does not predict future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the benchmark). For full risks, please see fund prospectus on www.whebgroup.com

 

General: This information, its contents and any related communication (altogether, the “Information”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Information does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Information including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Information is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413.

 

FP WHEB Sustainability Impact Fund

FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 6th Floor Bastion House, 140 London Wall, London, EC2Y 5DN. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich . The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the Representative in Switzerland.

 

WHEB Sustainable Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. The state of the origin of the Fund is Ireland. The Fund is registered for distribution to professional investors in Austria, France, Germany, Italy, Luxembourg, Norway, Singapore, Sweden and the United Kingdom, and is registered for offering to retail investors in Switzerland, Denmark and the Netherlands. The Fund is also available for professional investors in Belgium and Hong Kong. It is not available to investors domiciled in the United States.

 

WHEB Environmental Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Fund is registered for distribution to professional investors in the United Kingdom. It is not available to investors domiciled in the United States.

 

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