Sustainable Investing

What is sustainable investing?

At the basic level, Sustainable Investing is an approach to investment where environmental, social and governance (ESG) factors, in combination with traditional financial considerations, guide the selection and management of investments. This can be thought of as ESG integration to the investment process. This input focuses on the risks & opportunities ESG factors may bring when assessing a potential investment.

In addition to ESG integration, investors may look for investments that seek to achieve a positive environmental or social outcome. This can be thought of as sustainable outcomes as an output of the investment process.

This all comes under the broad banner of ‘sustainable investing’.

*Sustainable Finance Disclosure Regulation (SFDR)

EU-domiciled funds

Introduced by the European Commission (EC) and effective in March 2021, the Sustainable Finance Disclosure Regulation (SFDR) is a disclosure regulation which requires fund managers like Aberdeen to provide sustainability-related information about the EU-domiciled funds they offer (in Aberdeen's case almost all its EU-domiciled funds are based in Luxembourg). The goal is to ensure investors have the information they need to make investment decisions in line with their sustainability goals and preferences.

Articles 8 and 9 of the SFDR respectively prescribe the detailed disclosure requirements for products that promote environmental or social characteristics and products that have sustainable investments as their objective. By requiring detailed sustainability-related disclosures, SFDR also seeks to avoid the ‘greenwashing’ of financial products. Greenwashing can be described as “the practice of misrepresenting sustainability-related practices or the sustainability-related features of investment products” (International Organisation of Securities Commission (IOSCO): ‘Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management’, November 2021).

Sustainability Disclosure Requirements (SDR)

UK-domiciled funds

On 28 November 2023, the UK’s Financial Conduct Authority (FCA) published its final Sustainability Disclosure Requirements (SDR) and investment labels regime, setting out its expectations of asset managers when making sustainability claims.

The regulations include an anti-greenwashing rule, as well as product sustainability labels and disclosure requirements. They also include requirements for distributors to ensure that product-level information is available to their clients.

The ‘anti-green washing’ rule took effect on 31 May 2024, while ‘naming and marketing’ and disclosure rules came into force from 2 December 2024.

Under SDR ‘naming and marketing’ rules, UK-domiciled funds may be marketed as having sustainability characteristics without using a sustainability label (provided certain conditions are met); or they may have one of four labels – Sustainability Focus, Sustainability Improver, Sustainability Impact or Sustainability Mixed Goals. Further information can be found on the FCA website at https://www.fca.org.uk