New PIMFA blog: A deeper dive into SDR and Investment Labels
A deeper dive into SDR and Investment Labels
This webinar, building on two survey reports based on our membership’s ESG sentiment published earlier this year by PIMFA and Alpha FMC, looks to dive deeper into the results, particularly as they relate to Client Preferences and Reporting, Investments and Data and SDR and Upcoming Regulation.
An overview of the survey results showed that 69% of firms are already discussing sustainable investing preferences as part of suitability with their clients, despite the current lack of a regulatory requirement to do so, but are less confident around client reporting with only 36% of firms feeling they are doing a good or excellent job of educating either their clients or, indeed, their own workforce on this topic.
Specifically on Client Preferences & Reporting, some of the panel expressed surprise that 69% of firms were already actively considering ESG preferences, bearing in mind such problems as incorporating these into a firm’s existing investment structure, identifying the gaps from both an internal and external perspective and education, again both internal and external. There were also concerns around the challenges of lack of standardisation in terminology and access to the ‘right’ ESG data from a client reporting perspective.
It was also generally agreed that, whilst a lot of funds may have sustainable characteristics, they still may not meet the label requirements so a full spectrum analysis is needed in order to understand how to serve clients in this space effectively.
On Investments and Data , the survey found that, when looking at investment strategies member firms employed, negative screening is the most common at 71%. However, the FCA has indicated that a purely negative exclusionary screening approach is not going to be sufficient to meet the qualifying criteria for sustainable investment labelling under the future regulation.
A key challenge for funds in providing meaningful information to clients is the availability of data. The survey found that 36% of firms would like support on getting access to the right investment data. Data providers offer a range of products and services, but they each have a different methodology. It is important to mention here that the Treasury recently consulted on whether regulation for ratings providers should be introduced.
Five key elements are in play regarding the data issue. First, there’s the sourcing of backward looking ESG data points for listed directly held assets. Secondly, there’s sourcing ESG data for externally held funds, which is often a big thing in our space. Third, there’s forward looking data, such as climate scenario analysis, involves both data and the ‘tooling’ thereof. Fourth is matching the ESG data points to internal datasets like holdings, which is problematic to say the least, especially where terminology is concerned. Finally, number five is how do we actually expose this information, whether that’s back to investment teams or out to clients.
The panel broadly agreed that we’ve seen a fall in demand for ESG strategies and a rotation from growth into value stocks since the Russian invasion of Ukraine. Prior to that, we’d seen a bandwagon effect where investors were investing in ESG/Sustainable because they thought they would make money but now, on the one hand, it’s about risk mitigation and returns and on the other it’s about how sustainable investment actually works.
The FCA has been listening and trying to create labels focused on retail investors, but the question remains as to whether all investments under a sustainable label are suitable for a retail investor with a low risk appetite, particularly considering impact funds or new ventures. This, in turn, raises the potential challenge of unhappy clients if firms can’t deliver on what they are suggesting.
Moving on to SDR & Upcoming Regulation, the survey results suggest that the SDR will require lots of re-alignment of existing products and services. As it stands, we need to accept that very few funds will get a label which meets what the client demand is, so more clarity is needed around how the rules may change in the future once a UK Taxonomy or other criteria are applied. This may require further re-calibration of the labelling as we can’t have a thousand different versions to suit this client here and that client there.
International alignment is essential because of funds potentially being marketed across jurisdictions and because investment managers need the correct information from companies, particularly when considering global portfolios.
Sequencing is also critically important because investment managers can only collate accurate data if the companies are reporting it. This also has a major impact when considering global portfolios that are UK-based, as many jurisdictions are not moving on the same timescale as the UK.
The prevalent view is that regulation in this space will be an evolutionary process as we collectively learn how to adapt our processes to accommodate ESG and sustainable investing models. Clarity and global standardisation of terminology will be two of the keys to success.