What the UK “matching the ambition” of SFDR means for UK investors

Tom Williams, Co-Manager of Downing Renewables & Infrastructure, discusses the importance of SFDR Article 9 and why the FCA should look to adopt it. 

Tom Williams

The last thing that our industry needs is more ESG language being thrown into an already confused soup. However, there are some things that you can say about a fund which blows away the smoke, removes the mirrors and leaves an approach transparent for all to see: “We are an Article 9 fund.”

Sustainability is already a significant part of the investment industry; surveys of UK Advice firms note that 65% of providers already incorporate ESG factors into their investment proposition (FE Fundinfo Adviser Survey 2021). This adoption has been driven by a combination of client demand, institutional pressure, and emerging regulation. The UK Government and FCA are looking to strengthen regulation and have signalled their intention to 'match the ambition' of the EU's Sustainable Finance Action Plan. UK regulated firms are therefore looking across the channel at the implementation of MiFID II updates and Sustainable Finance Disclosure Regulation (SFDR) in particular, with the intention to evolve their business practices and adapt ahead of much anticipated UK Regulatory change. But what exactly is SFDR and why does it matter for UK intermediaries?

SFDR seeks to harmonise disclosures around the integration of sustainability risks, sustainable investment objectives, and the promotion of environmental or social characteristics in investment decision-making. This framework will create a transparent approach which will be hugely beneficial to investors.

Like many managers who fundraise in both the UK and Continental Europe, we have fallen within scope of SFDR and we welcome the transparency that lies at its heart.  Although it hasn’t changed what we do or the way that we do it, it provides a framework to describe our investment process and the portfolio, and a means to compare what we do to others in the market.

To put it simply, products marketed in Europe are categorised as falling within the remit of Article 6, Article 8 or Article 9:

  • Article 9 funds make impactful investments and have specific Sustainable Investment Objectives (Downing Renewables and Infrastructure Trust is an Article 9 Fund)
  • Article 8 funds are those that promote ESG characteristics
  • Article 6 applies to all funds not otherwise categorised under Articles 8 or 9

This framework is increasingly being adopted by global and cross-border asset managers to define their product offering, beyond the business segment that is directly regulated in Europe. A number of UK domiciled asset managers, without significant offshore businesses, have voluntarily adopted an equivalent classification and disclosure framework.

If I were trying to navigate someone through the differences between an Article 8 and an Article 9 product, I would say that it all hinges on intent.  We are allocating capital to economic activities that will get us closer to net-zero; it’s part of our investment objective and that’s what makes us an Article 9 fund. The most terrifying projection that I have seen, suggests that investment in clean energy technologies needs to be three times the current levels throughout the 2020s, just to keep the possibility of a 1.5˚C climate scenario alive.  We will invest to help close this funding gap.

Impact is no longer the preserve of the ultra-high-net worths and foundations. Institutional investors increasingly want to allocate their capital to propositions that provide attractive returns and fund the change that they want to see in the world. By mirroring SFDR, the UK Government and FCA will make it much easier for them to make informed decisions.

Tom Williams is Partner and Head of Energy and Infrastructure at Downing LLP