Green Governance: FCA Clampdown Could Affect 300 Funds

As
part
of
the
raft
of
new
measures,
the
FCA
created
four
sustainability
labels
to
help
consumers
differentiate
between
products
with
different
sustainability
objectives
and
investment
approaches.

The
labels
are
“Sustainability
Focus”;
“Sustainability
Improvers”;
“Sustainability
Impact”;
and
“Sustainability
Mixed
Goals.”
A
brief
description
of
each
is
provided
in
the
table
below.

Use
of
labels
is
voluntary
and
asset
managers
will
be
allowed
to
use
them
from
July
31.

Within
the
next
few
months,
asset
managers
will
be
reviewing
their
product
lines
to
consider
which
funds
would
qualify
for
a
label.

About
300
UK
Funds
May
Opt
For
a
Label

Based
on
conversations
we
have
had
with
15
asset
managers
and
our
knowledge
of
the
strategies
and
the
firms,
we
have
attempted
to
predict
which
funds
would
opt
for
a
label
and
which
label
they
would
use.
The
purpose
of
this
exercise
is
to
assess
what
the
market
of
UK
sustainability-labelled
funds
may
look
like
by
the
end
of
the
year.

In
total,
we
estimate
about
300
funds
would
opt
for
one
of
the
four
labels,
representing
just
over
8%
of
funds
domiciled
in
the
UK
and
less
than
3%
of
all
funds
available
for
sale
in
the
UK.
In
terms
of
assets,
these
funds
would
amount
to
around
£110
billion.

Two
Labels
Will
Dominate

Based
on
our
assessment
of
these
300
funds,
we
predict
that
Focus
will
be
the
dominant
label,
representing
almost
half
(46%)
of
labeled
products,
followed
by
Mixed
Goals
(31%),
Improvers
(12%),
and
Impact
(11%).

Of
the
four
labels,
it
appears
asset
managers
have
the
best
understanding
of
the
Focus
label
and
the
type
of
strategy
that
will
qualify
for
this
label.
Managers
we
spoke
to
seemed
confident
that
strategies
meeting
the
criteria
for
Article
9
under
the
EU
Sustainable
Finance
Disclosure
Regulation
(SFDR),
portfolios
with
high
sustainable
investments
as
defined
under
SFDR,
as
well
as
thematic
strategies
would
meet
the
requirements
for
the
Focus
label.

We
expect
the
Mixed
Goals
label,
which
was
created
mainly
to
accommodate
multi-asset
strategies,
to
be
a
popular
label
for
portfolio
managers
who
want
to
keep
some
flexibility.
The
requirements
of
the
label
should
allow
managers
to
create
as
many
allocations
to
sustainability
objectives
as
they
see
fit
as
long
as
70%
of
the
overall
assets
are
aligned
with
the
criteria
of
at
least
two
of
the
other
three
labels.

When
the
FCA
unveiled
its
proposed
labels
in
2022,
the
Improvers
label
was
hailed
as
a
great
idea,
recognising
the
need
to
build
portfolios
for
sustainability-oriented
investors
that
reflect
the
current
state
of
the
world:
one
that
houses
few
companies
that
are
sustainable
but
many
more
that
are
transitioning
and
aspiring
to
be
sustainable
one
day.

According
to
our
preliminary
analysis,
we
don’t
expect
the
number
of
Improvers-labelled
funds
to
be
among
the
largest
because
managers
may
prefer
to
hold
a
mix
of
assets
that
have
different
sustainability
strategies,
including
an
Improvers
sleeve.

We
predict
Improvers
funds
will
represent
only
around
14%
of
labeled
products,
although
this
proportion
may
be
higher
if
more
funds
end
up
setting
improvement
key
performance
indicators
at
product-level
(as
opposed
to
KPIs
for
individual
assets)
such
as
portfolio
decarbonisation
targets.
Managers
may
also
be
tempted
to
test
the
limit
of
the
label’s
requirements
by
setting
low
improvement
thresholds.

Finally,
and
perhaps
unsurprisingly,
we
expect
only
a
small
number
of
funds
will
use
the
Impact
label
because
of
its
strict
criteria.
Managers
of
Impact-labeled
funds
will
have
to
demonstrate
a
theory
of
change
at
both
the
investor
level
(through
engagement,
for
instance)
and
asset
level.

It
will
therefore
remain
a
challenge
for
managers
to
show
evidence
of
impact
in
the
listed
market.
Impact
will
be
easier
to
evidence
for
strategies
focused
on
bonds
with
use
of
proceeds
(for
example,
green
and
social
bonds)
as
well
as
those
investing
in
private
assets,
including
direct
property
and
infrastructure,
which
are
more
suited
in
a
closed-end
investment
trust
format.

Equity
Will
Dominate.
Fixed
Income
Will
Be
Underrepresented

Diving
into
our
universe
of
approximately
300
UK
funds,
we
found
just
over
half
(52%)
of
the
300
labelled
funds
would
offer
exposure
to
equities,
while
about
31%
would
be
allocation
(multi-asset)
funds.
Fixed
income
would
account
for
only
around
8%
of
labe;led
funds.

By
comparison,
the
overall
UK-domiciled
fund
market
includes
42%
of
equity
funds,
39%
of
allocation
funds,
and
11%
of
fixed-income
funds.
When
considering
all
funds
available
for
sale
in
the
UK,
equity
funds
represent
48%
of
the
market,
allocation
funds
only
18%,
and
fixed
income
22%.

Passive
Funds
Will
Be
Significantly
Underrepresented

Out
of
the
410
UK
funds
with
sustainability-related
terms
in
their
names,
only
about
50
are
passively
managed,
and
of
these,
we
predict
that
less
than
half
will
opt
for
a
label,
as
the
majority
of
UK-domiciled
passive
funds
are
exclusionary
or
tilted
strategies.

Most
passive
funds
available
for
sale
in
the
UK
(1,960
in
total)
are
overseas
exchange-traded
funds,
typically
domiciled
in
Ireland
or
Luxembourg,
which
are
currently
out
of
scope.
The
limited
number
of
labelled
passive
funds
will
reduce
the
choice
offered
to
sustainability-oriented
investors
in
the
UK.

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