With two major players in European sustainability labels upgrading their standards in 2024, what’s the impact for investors – and what role do labels play versus regulation?
Let’s start with one of the most familiar sustainability regulations, the EU Sustainable Finance Disclosure Regulation (SFDR), which laid the foundations for improving transparency for investors. Intended to help investors make informed choices, SFDR requires financial institutions to disclose the sustainability information of their products.
Labels play a different role. They provide assurance of the minimum percentage of assets in a fund that meet sustainability standards. Sustainable product labels have two important characteristics:
Their criteria are more prescriptive than SFDR transparency regulation.
They allow funds under the same label to be more easily compared.
Raising the bar
Like regulations, sustainability labels vary. Depending on their requirements, they can be awarded by different bodies – with the aim of advancing quality standards. Two major players in European sustainability labels, Towards Sustainability and the French Label ISR1, are revamping their guidelines in 2024 with this goal in mind.
Towards Sustainability is intensifying its standards by imposing stricter exclusion thresholds for critical business activities, such as the extraction of oil and gas. It will also require funds to divest from non-renewable energy producers earlier than planned, by June 2025 instead of 2027. Meanwhile, for the first time, ISR is introducing binding exclusion criteria for all labelled funds and is emphasising companies’ alignment with the Paris Agreement.
We actively engage in consultations around developments like these to ensure that any unintended impacts on portfolio construction are considered. Some of the metrics used to set label criteria, such as the EU sustainable investment share label, are not standardised. The risk is that providers of products with higher standards will, in effect, be penalised.
For funds applying labels from Towards Sustainability and ISR, these industry consultations resulted in stricter exclusions, a reduction of at least 25% of the investable universe, and a requirement to outperform sustainability key performance indicators (KPIs) of the fund’s benchmark index. One such KPI is the lowering of greenhouse gas intensity – a metric for sustainable products that is likely to become mainstream in the future.
We noticed a strong focus on climate change in both consultations. We also expect biodiversity and social considerations to be increasingly embedded into such industry investment standards in future.
Engaging with label providers is part of our strategy for greater transparency and clarity around sustainable investing solutions, to ensure a competitive offering that meets a diverse range of client needs.
1 Investissement Socialement Responsable
Five themes for 2024
Theme 3: ESG is dead, long live ESG 2.0
We believe that ESG will return to its original purpose of risk materiality - a theme explored in the third of our blog series on sustainability in 2024.
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