Sustainability Disclosure Requirements labels: good and poor practice

Good practice example

It’s clear that the objective is to invest in assets that are environmentally or socially sustainable.

The objective also briefly explains the sustainability characteristics.

Example wording: ‘The fund aims to invest in assets that make a positive contribution to the environment and society through their products/services in areas such as: 

• ‘Climate change mitigation and adaptation – which includes... 
• ‘Financial and digital inclusion – which we define as… 
• ‘Health and wellbeing – such as…'

Poor practice example

The objective is not clear, specific and measurable. The reader cannot identify the specific environmental or social outcomes the fund is seeking to achieve.

For example, poor wording for the objective might say the fund aims to:

• ‘Make a positive contribution to planet and/or people.’
• ‘Contribute to SDGs.’
• ‘Create value for society.’ 
• ‘Invest in companies that meet a robust standard of sustainability.’ 
   

Good practice example

A fund invests in utility companies providing access to clean energy and clean water under a sustainable infrastructure theme. The disclosures outline potential negative outcomes from this investment approach, such as new infrastructure having an adverse impact on landscapes and biodiversity. 

Poor practice example

Selecting a company based on some sustainable attributes without considering the complete picture, in other words, material negative outcomes or conflicts that might arise in relation to the products, services or activities of the wider company.

For example, a fund holds industrial conglomerates with some sustainable activities in certain business units but is also involved in carbon/water-intensive activities in many of its principal units, which is not disclosed.

Good practice examples

A scoring system that classifies assets as sustainable if they score 7 out of 10 includes a description of the criteria that assets would need to meet, or attributes that they would need to have, to get that score. This includes reference to external frameworks or principles, and may include examples of the types of assets that could meet each score.

The manager refers to these assets as ‘leading’. However, there is a clear ‘absolute’ standard of sustainability (the scoring system) that meets the criteria and the ‘relative’ term (‘leading’) is used in addition. 

Poor practice examples

The standard of sustainability is not backed by evidence, or the firm refers to the fact that its peers have used a similar standard as evidence but cannot provide any authoritative evidence of its own.

Example 1

A general sportswear retailer is held in the fund on the basis that it meets the fund’s standard of sustainability and in doing so derives at least 50% revenue from ‘health and wellbeing’ products and services. However, when questioned, the firm cannot substantiate that claim.

Example 2

An asset scores 8/10, based primarily on good governance policies and without a clear indication of environmental or social outcomes. (Governance enables these outcomes, but it’s not an end in itself.)

Poor practice example

The firm engages broadly on ‘ESG’ or ‘sustainability’ without explaining how this is consistent with the fund’s sustainability objective.
 

Good practice examples 

Example 1

A fund has a sustainability objective to invest in products/services across several themes.

It uses KPIs that show how the fund is invested across those themes.

Separately, it includes a KPI which will confirm at least 70% of the fund is invested in line with its objective.

Additionally, KPIs could measure environmental or social outcomes.

Example 2

Where a fund has an objective to invest in companies that focus on water and waste efficiency, it uses KPIs that measure water saved, waste reused and so on. 

Poor practice example

The fund holds a company that provides a range of products or services (such as a DIY store or supermarket). 

The firm claims that 100% of the company’s revenues is derived from sustainability products/services but cannot substantiate that claim. 

Good practice example

A social fund’s objective is to invest in assets that aim to improve labour standards, including paying the living wage across the supply chain. 

The disclosure sets out how the firm intends to measure this outcome.  

Poor practice example

A fund has a climate-related objective that is only based on reducing Scope 1 and 2 emissions, but gives the impression that the aim is to reduce ‘all’ emissions (including Scope 3). 

Good practice example

The firm selects assets that have the potential to meet an emissions target over a specified period of time.

The firm decides which assets have the potential to meet the standard based on disclosures, clear strategies, transition plans and so on.

For instance, it may include a defence and security company which has a public and Science-Based Targets Initiative-validated net-zero target, with:

• Plans to achieve the target.
• Formal accountability for interim and overall targets.
• Annual disclosures to report progress.

Poor practice example

The firm assumes that assets will set decarbonisation targets, without any robust evidence to support this.

Good practice example

KPIs show decarbonisation where the fund’s sustainability objective is to invest in assets with the potential to decarbonise.

Disclosures may also include metrics to show the proportion of assets that are ‘on target’ to decarbonise as well as some contextual information. 

For instance, the fund/assets reduced [x] tonnes of carbon dioxide equivalent compared to [y] baseline. This is [z]% progress towards the objective.

[X]% of the fund is on target to meet the decarbonisation objective. However, progress towards the objective may not be linear. 

Poor practice example

Firms continue to engage with companies that aren’t making progress towards the objective, with no timeframe for them to respond to the engagement, or next steps if they don’t. Or, the timeframe for engaging with assets does not align with the short and medium-term targets for the fund. 

Good practice example

The fund aims to make a positive impact by investing in companies from 4 environmental impact areas: 

• climate action
• clean energy
• water efficiency 
• biodiversity

The outcomes are clear in each of these areas (for example, increasing clean energy generation through low and zero-carbon alternatives and improving access to clean energy).

Poor practice example

Funds seek broad or unmeasurable impacts.

Delivering social impact through the ‘development of thriving cities’ or ‘building an inclusive economy’, without explaining what these mean or how they will be measured.

Good practice examples

Example 1

A health fund targets areas that lack services. Specified outcomes include increased hospital bed capacity and new clinical space, which are reflected in the KPIs.

Example 2

A fund’s assets aim to provide the general population with access to education.

The firm clearly sets out what change it expects, such as:

• Expanding to less developed economies.
• Improving access to education through online resources.
   

Poor practice example

A fund invests in banks or insurers providing basic financial services to the general population. 

However, the firm does not clarify:

• What change it expects by investing these assets, or why. 
• How its investment activities will make a positive impact.  

Good practice example

The firm engages with the assets on core topics about the sustainability objective, with clear milestones. This could include engaging with management to guide capital spending towards sustainable outcomes and therefore boost impact. 

The firm measures how the companies respond to this engagement. In its disclosures, it includes KPIs that measure whether the company is delivering greater impact. The firm does not claim sole responsibility for any outcomes achieved. 

As well as helping achieve positive impacts, the firm may also engage to help the assets to mitigate negative impacts. 

Poor practice example

The KPIs are not consistent with the objective and theory of change. 

For example, if the theory of change relates to improvements to financial inclusion for specific communities but the KPIs measure bank accounts provided, or insurance paid out, to the general population.

Poor practice examples

The fund intends to invest in assets that focus on sustainability (Focus) or have the potential to improve over time (Improvers). However, all assets have Improvers’ attributes, and it is not clear which assets already meet a standard of sustainability and are therefore considered Focus.

Although an asset makes up 10% of the fund’s gross value, the firm counts this as 10% towards a ‘Focus proportion’ of the threshold as well as 10% of an ‘Improvers proportion’. It is double counted.