How regulation is shaping sustainable investing

For sustainable investors, the ability to invest internationally brings benefits identical in concept to those faced by all investors, even those without a sustainable focus. 

Gaining access to a greater breadth of potential geographies and industries improves portfolio diversification.

Importantly, it also allows for the underlying companies to access a larger pool of external capital so they can develop what may be world-beating advances in their respective industries.

Whether technology, engineering, healthcare, agriculture or any number of positive investment themes, growing sustainable businesses can be more effective if barriers such as geographic boundaries are ignored.

What’s in and what’s out of a taxonomy becomes a focal point for debate.

Fundamentally, as sustainable investing becomes the norm, companies around the world will have to embrace sustainability, and asset owners and managers can speed up this transition by thinking globally. 

Alongside this, there are regulatory developments in sustainable investing around the globe, which means there are many considerations for advisers that are developing global, sustainable portfolios. 

More scrutiny and higher standards

Here in the UK, the FCA released its final Policy Statement on the Sustainability Disclosure Requirements in late 2023.

It introduces four labels for funds with sustainable attributes (note that this covers social and environmental characteristics):

• Sustainability Improvers: investment in assets that have the potential to improve their sustainability performance over time to a robust standard 
• Sustainability Focus: investment in assets that have already achieved a robust level of sustainability 
• Sustainability Impact: investments in assets to deliver a pre-determined positive impact
• Sustainability Mixed Goals: for funds with a mix of the above approaches

There are similarities between the SDR and the European Union’s Sustainable Finance Disclosure Regulation.

Although SFDR is technically a disclosure regime rather than a label, both schemes require in-scope funds to have clear sustainability objectives and both have adopted clear categories for funds.

Under SFDR, EU-based fund managers need to state whether their fund is aligned to:

• Article 6 (of the SFDR legislation): does not incorporate any sustainability considerations
• Article 8: promotes social or environmental characteristics (aka a light green fund)
• Article 9: has sustainable investment as the fund objective (aka a dark green fund). 

Minimum thresholds

The UK’s SDR requires all labelled funds to have at least 70 per cent of assets aligned with the fund’s sustainability objective.

The remaining 30 per cent gives asset managers room to meet liquidity and risk management requirements.

In the US, the SEC has also adopted a minimum threshold approach, requiring 80 per cent of assets to align with any investment style referenced in the fund’s title, including sustainable investment.