Sustainable Finance Disclosure Regulation - The what, the how and why it matters for South African investors

We believe the introduction of SFDR will help to further embed ESG analysis, and our thinking on sustainability more broadly, into our investment capabilities and processes.

Jun 21, 2022

7 minutes

Salome Young
Paul Hutchinson
We believe the introduction of SFDR will help to further embed ESG analysis, and our thinking on sustainability more broadly, into our investment capabilities and processes.

Background

In recent years we have seen growing emphasis on, and desire for, a more sustainable global economy. These goals are increasingly being supported by investors and financial advisors, with the result that many asset managers have begun to align themselves and the funds they manage to these principles. Questions have, however, been raised around whether managers and funds are truly aligned and how best to compare competing sustainability-focused investment funds.

In March 2021, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into effect. The SFDR is part of a package of legislative measures and seeks to strengthen disclosures made by asset managers to their clients, thereby helping investors to understand, compare, and monitor the sustainability characteristics of investment funds. By standardizing sustainability disclosures, the SFDR aims to provide more transparency on the degree to which investment funds have environmental and/or social characteristics, or sustainable investment objectives. It further aims to prevent greenwashing1, meaning that asset managers will no longer be able to simply brand a fund as being sustainable or environmentally friendly, without detailing how this is achieved.

To accomplish this, the SFDR requires all funds, both sustainable and non-sustainable, to disclose their Environmental, Social and Governance (ESG) considerations to potential investors, using a common framework. To help investors distinguish between funds, a strategy (fund) will now be classified into distinct categories and make disclosures under either Article, 6, 8 or 9 of the SFDR, based on how sustainability is incorporated into the investment process/strategy.

The SFDR disclosure framework

Table 1: The SFDR disclosure framework

Sustainable Investing at Ninety One and impact of the SFDR

Importantly, although they are evolving rapidly, sustainability and ESG are not new concepts at Ninety One, where we aim to make a positive difference to people and the planet, while delivering long-term investment returns. We do so through a robust and comprehensive integration of sustainability analysis and research into our investment processes. We therefore welcome the greater emphasis that the SFDR places on the promotion of environmental and social characteristics, and companies and issuers that follow good governance practices. We believe that these developments will help to further embed ESG analysis, and our thinking on sustainability more broadly, into our investment capabilities and processes.

Ninety One has developed a framework for categorising our products based on our approach to ESG and sustainability. We classify all our products within one of four different ESG approaches, as illustrated in the following diagram and discussed in more detail in Annexure A. This classification framework enables Ninety One to set expected ESG outcomes both internally and externally.

Figure 1: Ninety One ESG Classification Framework

Figure 1: Ninety One ESG Classification Framework

In addition, Ninety One has been a signatory to the UN-backed Principles for Responsible Investing (PRI) since 2008. As such, our responsible investment practices are assessed annually by the PRI team. For the purposes of disclosure and to encourage industry discussion around best practices in sustainable investing, we publish in full the PRI Transparency and Assessment Reports on our website2.

Ninety One is also a signatory to the Net Zero Asset Managers Initiative (NZAMI) and is committed to ensuring that our portfolios achieve net zero emissions by 2050. We are committed to playing our part in advancing the transition to carbon neutrality. We recognise that net zero will be a long and difficult journey, but if we set about it in the right way, we can ensure that it is fair, inclusive, and ultimately successful.

The Ninety One funds impacted

The SFDR applies to all asset managers (as financial market participants) based in the European Union. As Ninety One offers the Ninety One Global Strategy Fund (GSF) domiciled in Luxembourg, the GSF sub-funds are impacted by the introduction of the SFDR.

From June 2022, 20 additional GSF sub-funds will be classified as Article 8 funds. The SFDR is relevant to South African investors and advisors as several of the GSF sub-funds have been approved for sale in South Africa by the Financial Sector Conduct Authority, in terms of Section 65 of the Collective Investment Schemes Control Act. In addition, each of the four Ninety One rand-denominated feeder funds – the Ninety One Global Multi-Asset Income Feeder Fund, Ninety One Global Strategic Managed Feeder Fund, Ninety One Global Franchise Feeder Fund and the Ninety One Global Strategic Equity Feeder Fund ‘feeds’ into the respective Ninety One GSF sub-fund.

Although the integration of ESG considerations into the investment decision-making process applies to all the Ninety One GSF sub-funds, they take different approaches to the environmental and social characteristics they promote. The following three Section 65-approved GSF sub-funds will now be categorised as funds promoting environmental and social characteristics within the meaning of Article 8 of SFDR:

  • Ninety One Asia Pacific Franchise Fund
  • Ninety One Global Franchise Fund
  • Ninety One Global Multi-Asset Income Fund

The rand-denominated Ninety One Global Franchise Feeder Fund and the Ninety One Global Multi-Asset Income Feeder Fund invest directly into the respective dollar funds.

Finally, the Section 65-approved Ninety One Global Environment Fund has been categorised under the SFDR Article 9 since its introduction in March 2020.

A practical example: Ninety One Global Franchise Fund Article 8 sustainability characteristics

The Ninety One Global Franchise Fund seeks to maintain a carbon profile meaningfully lower than the benchmark. As such, the fund invests in companies with low carbon intensity and will not invest in companies directly involved in thermal coal extraction or power generation; the production and generation of fossil fuels; the manufacture and production of controversial weapons; and those deemed to be in violation of global norms (e.g. United Nations Global Compact, being a voluntary initiative based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals).

Figure 1: Ninety One Global Franchise Fund - attractive sustainability outcomes

Figure 1: Ninety One Global Franchise Fund - attractive sustainability outcomes

MSCI ESG rating distribution3
(% equities in portfolio)

MSCI ESG rating distribution

Source: MSCI, Ninety One, Morningstar. As of 31 March 2022. Sustainability score and rank within Global Equity Large Cap category.

Investing for a better tomorrow

The introduction of the SFDR resonates with Ninety One, where our purpose is simple; ‘Investing for a better tomorrow’. On behalf of our clients, we invest sustainably in four ways:

  1. All our investment strategies incorporate ESG factors as we believe that ESG investing should enhance long-term performance;
  2. As an active investor, we engage with portfolio companies and governments to encourage them to address sustainability and improve their ESG performance;
  3. We offer dedicated investments targeting opportunities arising from the world’s transition to a more sustainable model; and
  4. Our solutions include investments that have a positive impact.

By investing sustainably, we aim to help people lead better lives in a better world. The introduction of the SFDR allows us to share within a consistent framework how this ambition is built into our funds and help investors and advisors better understand our funds that encompass environmental and social characteristics and / or have a sustainable investment objective.

Annexure A
ESG Integration

The ESG risks and opportunities of all investments are considered alongside traditional financial analysis. Active ownership is conducted through engagement and proxy voting.

Investments in companies involved in the manufacture or production of controversial weapons are not permitted. Principle adverse impacts are considered within the investment process.

Enhanced Integrated

In addition to adopting ESG integration, supplementary approaches are implemented to further reduce ESG risk:

  • Exclusion of controversial sectors/activities
  • Positive tilting relative to investable universe e.g., higher ESG scorers, lower carbon intensity
  • Climate assessment using industry recognised net zero alignment frameworks
  • All investments must demonstrate good governance practices

Principle adverse impacts are considered within the investment process.

Sustainable

In addition to adopting ESG integration, supplementary approaches are implemented to further reduce ESG risk and maximise ESG opportunities as viewed through an externalities – positive or negative impact on society and/or the environment – framework:

  • Exclusion of sectors/activities with the greatest negative externalities
  • Positive inclusion approach which identifies investments that should benefit the most from the transition to a more sustainable global economy e.g., those with greatest positive externalities
  • Climate commitment to achieve net zero emissions across all investments by 2050
  • All investments must demonstrate good governance practices

Principle adverse impacts are considered within the investment process.

Impact

In addition to adopting ESG integration, supplementary approaches are implemented to further reduce ESG risk and maximise ESG opportunities as viewed through an externalities – positive or negative impact on society and/or the environment – framework:

  • Exclusion of sectors/activities with the greatest negative externalities
  • Positive inclusion approach which identifies investments in financing solutions to environmental and/or societal challenges e.g., environmental companies enabling the energy transition
  • Climate commitment to achieve net zero emissions across all investments by 2050
  • All investments must demonstrate good governance practices

Principle adverse impacts are considered within the investment process.

Download the PDF

1 Greenwashing is when a company purports to be environmentally conscious for marketing purposes but isn’t making any notable sustainability efforts.
2 PRI Transparency and Assessment Reports
3 Includes a 2.8% proportion of unrated equity in Global Franchise against 0.2% benchmark. Residual 3.3% is cash.

Salome Young
Legal Counsel
Paul Hutchinson
Sales Manager

Important information

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Ninety One Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.ninetyone.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, RMB, 3 Merchant Place, Ground Floor, Cnr. Fredman and Gwen Streets, Sandton, 2196, tel. (011) 301 6335. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Ninety One Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. Ninety One SA (Pty) Ltd is a member of the Association for Savings and Investment SA (ASISA).

This communication is the copyright of Ninety One and its contents may not be re-used without Ninety One’s prior permission. Ninety One Investment Platform (Pty) Ltd and Ninety One SA (Pty) Ltd are authorised financial services providers.