ESG ETFs may struggle to meet upcoming Sustainable Disclosure Regulation (SDR) labels, the UK’s Investment Association (IA) has said.
The industry body warned that passive products lack the escalation policies needed to qualify under one of three proposed labels – ‘sustainable improvers’, ’sustainable focus’ and ‘sustainable impact’.
The response to the Financial Conduct Authority’s consultation on SDR highlighted the need for fund houses to add escalation policies but noted that it was “not feasible” for most.
“Index trackers may struggle to meet the stewardship requirements due to the limited potential escalation. While ETFs tracking more customised indices might be able to introduce escalation policies such as divestment, it is not clear that this is feasible for the majority,” the IA said.
The consultation had indicated index funds could meet the qualification needs for the ‘sustainable improvers’ category, but the IA said it was unclear from the proposal whether funds tracking an index that aims to have a certain ESG score improvement compared with the parent index can qualify within the group.
Ethical funds may also be left out in the cold under the current proposals, the IA said, with such funds currently not qualifying for a label.
Funds that contain a blend of all three categories may not qualify for any of them, the IA also highlighted.
“We are concerned that the highly prescriptive marketing rules will make it difficult for investors to find these types of funds,” the IA stated.
Changes to marketing and naming rules should be considered to improve consumer choice, the IA said in its consultation response, while asset managers should be allowed to use internal ESG frameworks as a standard for monitoring change.
Chris Cummings, chief executive of the IA, said the current proposals are “overly prescriptive” and would exclude a raft of existing funds.
“Currently, the proposals contain aspects which are overly prescriptive and would exclude many existing funds, which are being sold legitimately to satisfied customers based on a strategy related to responsible or sustainable investment,” he said.
But SDR is creating a “higher bar” than that in the EU in terms of sustainability disclosure legislation, investor group UK Sustainable Investment and Finance Association (Uksif) said, although tweaks to how labels are applied must be considered.
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