SFDR reinforces Schroders’ commitment to demonstrate credentials in sustainable and impact investing
SFDR reinforces Schroders’ commitment to demonstrate credentials in sustainable and impact investing
On March 10th SFDR came into effect. The new rules are part of the EU’s Sustainable Finance Action Plan, a wide effort to battle climate change. The EU has built on the momentum of the Paris Agreement (2016) to present a growth strategy, aiming to make Europe the first climate-neutral continent. Parallel to developing the Green Deal, the European Commission (EC) had created a plan for a sustainable finance strategy. SFDR sets requirements for financial market participants to disclose information on the environmental and social impacts of their policies and financial products. “The sustainable regulation introduced in the EU, has one ultimate objective: to shift investment towards more sustainable projects and businesses so that we transition to a low-carbon economy and achieve carbon neutrality by 2050”, emphasizes Hannah Simons, Head of Sustainability Strategy at Schroders.
Asset Management 3.0 – Risk, Reward and Impact
This important piece of regulation has to be put in the context of what has been happening in the asset management industry over the last 20 years. With the growth of sustainable investing, asset management is evolving to the next phase. “In a way, the rise of impact as a third dimension alongside risk and return marks the shift from Asset Management 2.0 to Asset Management 3.0”, explains Carolina Minio-Paluello, Global Head of Product, Solutions & Quant at Schroders: “Even investors who do not focus on impact, can make better-informed decisions by understanding the social impact of companies.”
“Even investors who do not focus on impact, can make better-informed decisions by understanding the social impact of companies”
In our vision, sustainable investing focusses on investing in companies following sustainable business practices in order to deliver risk-adjusted returns to our clients, while impact goals investing is about achieving the dual objective of delivering risk-adjusted returns whilst seeking to contribute positively to the solutions needed to solve the societal and environmental challenges, such as Environment, Inclusion, Health and Wellness, Responsible Consumption and Sustainable Infrastructure, that we face. To allow us to measure and assess impact, we’ve developed a set of proprietary tools, collectively known as impactIQ. Every company impacts society in many different ways. Some of these are positive - such as salaries and benefits or medicine provision – while others such as carbon emission and tobacco production have a negative impact. SustainEx™, our award-winning tool, translates these social impacts into an estimate of the financial cost they might cause for a company. ThemEx, a tool we are currently developing, will allow us to estimate companies’ contribution, positive or negative, to the 17 UN Social Development Goals. Our tools play a role in aligning Schroders sustainable investing practices with the SFDR’s disclosure and reporting .
Enhanced transparency through greater disclosure
SFDR involves the disclosure of three types of information.
- Mapping sustainability risk to investments: are there sustainability factors that could materially affect the value or return of an investment?
- The consideration of investment risk to sustainability goals: could investments in a client’s portfolio have a material negative impact on the environment or society?
- Disclosure of product specific practices and characteristics: if a product is marketed on the basis of sustainability considerations, what does that mean in practice, how does it work and how has it performed again any sustainability objectives that have been set?
“The rules get to the heart of the manager’s approach to sustainability for a particular product”, explains Hannah Simons: “Each type of SFDR product category takes a different road to sustainability. Article 8 of SFDR focuses on investing in more sustainable companies. It applies to financial products that promote, among other characteristics, environmental or social characteristics. Article 8 products typically have an active ESG component to their investment process, with attention being aimed towards environmental and social factors as well as good governance principles.
Article 9 refers to financial products that have sustainable investment as an objective, for example reducing carbon-emissions. These are products that aim to have a positive impact on environmental and/or social factors, and are also focused on a positive sustainability outcome.”
Financial products that don't meet the criteria of either Article 8 or Article 9, can be referred to as Article 6 products. These may consider sustainability risk alongside other factors in investment decision making (and could include general exclusions like tobacco or coal industries), but do not have an environmental or social characteristic.
Over the last few years, Schroders has developed an array of tools to help our investors assess the sustainability risks and impacts of the assets in which we seek to invest. They enrich our research process and enable our investors to ask questions of how a company is managing its business, the impact this might have on society and stakeholders or how it may be contributing to sustainable themes. “This is a journey and SFDR is a key milestone, but it will be followed by other regulations, like the EU taxonomy, the implementation of the second part of SFDR in early 2022 and the new EU Ecolabel”, adds Hannah Simons.
“At Schroders, we now have a range of tools that help us assess and understand impact, like, for instance, our Carbon VaR model which helps us understand how a company will be impacted by higher carbon prices, and a climate alignment tool to demonstrate the temperature warming a portfolio is aligned to. Our proprietary tools rely on data published by the underlying companies as well as other independent data sources and input from our investment teams that use them.”
 Source: Schroders SustainEx scoops first place for Impact Reporting in the Environmental Finance IMPACT Awards 2020 – 16-09-2020
Transparency on impact measures
In using tools like SustainEx™ in our reporting, we aim to support our clients in understanding the sustainability characteristics of their investment portfolios. As illustrated below, using SustainEx™ we estimate the net impact of the portfolio having regard to certain measures in comparison to the product’s relevant benchmark. We also report on key sustainability metrics. We expect new reporting standards to be developed in the coming years, which will also be included in the reports.
Schroders’ SFDR path
“The essence of this new regulation is for managers to demonstrate to clients that they are actually managing sustainable portfolios and to enable their clients to make informed investment decisions about the products in which they wish to invest”, explains Carolina Minio-Paluello. “When SFDR became effective in March 2021, Schroders had almost 30% of the assets in our main Luxembourg fund range classified under Article 8 and 9. We are now working towards having the majority of the assets in that range classified in this way later this year.”
Schroders SFDR Event: Sustainability for Everyone
At our recent event SFDR: Sustainability for Everyone, our experts Hannah Simons, Head of Sustainability Strategy and Carolina Minio-Paluello, Global Head of Product, Solutions & Quant, shared their views on SFDR, the why and how of the EU’s new landmark regulation. They touched upon the implications for the industry and how to best put this regulation into practice.
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Schroders has expressed its own views and opinions in this document and these may change. The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored
The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.