ESG 4.2 Criteria for applying sustainability labels

1A manager must, in order to use a sustainability label in relation to a sustainability product under ESG 4.1.1R(2)(a), ensure that both the general and specific criteria which relate to that particular label have been met and continue to be met on an ongoing basis.

1A sustainability product using a sustainability label must:

1. (1)

   have an explicit sustainability objective as part of its investment objectives that:

   1. (a)

      aligns with one of the sustainability labels set out under ESG 4.1.1R (as detailed further under ESG 4.2.13R, ESG 4.2.14R, ESG 4.2.16R and ESG 4.2.18R); and

   2. (b)

      is clear, specific and measurable;

2. (2)

   meet the following requirements:

   1. (a)

      at least 70% of the gross value of the product’s assets must be invested in accordance with its sustainability objective, except where:

      1. (i)

         the product is still to be fully invested in assets, as set out in the product’s investment strategy under ESG 4.2.9R(2)(b); or

      2. (ii)

         the manager is taking steps under ESG 4.2.22R.

   2. (b)

      the product’s assets must be selected with reference to a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability, as applicable under ESG 4.2.13R, ESG 4.2.14R and ESG 4.2.17R(1); and

   3. (c)

      where the product invests in assets that are not in accordance with its sustainability objective, those assets must not have attributes that conflict with that objective; and

3. (3)

   have robust and evidence-based key performance indicators (KPIs) that can demonstrate the product’s progress towards meeting its sustainability objective.

1A manager must, in addition to ensuring that a sustainability product meets the requirements set out in ESG 4.2.4R:

1. (1)

   determine whether pursuing that product’s sustainability objective could result in negative environmental and/or social outcomes;

2. (2)

   determine the sustainability product’s:

   1. (a)

      investment policy for achieving its sustainability objective; and

   2. (b)

      investment strategy for meeting the requirements under ESG 4.2.4R(2), including, where appropriate, the timescales by which the product is expected to be fully invested in assets;

3. (3)

   obtain or undertake an assessment of the standard referred to under ESG 4.2.4R(2)(b) to confirm that it is appropriate for determining which assets the product invests in, ensuring that:

   1. (a)

      the assessment, whether obtained from a third party or undertaken by the manager, is independent from the manager’s investment process; and

   2. (b)

      the individuals responsible for carrying out the assessment are appropriately skilled;

4. (4)

   identify any assets which the sustainability product invests in for reasons other than to pursue its sustainability objective;

5. (5)

   identify the KPIs that the manager will use for the purposes of ESG 4.2.4R(3);

6. (6)

   have an escalation plan setting out the actions that the manager will take if any of the sustainability product’s assets do not demonstrate sufficient performance against either the product’s sustainability objective or the KPIs under ESG 4.2.4R(3);

7. (7)

   in relation to the manager’s governance and resources, ensure that:

   1. (a)

      there are appropriate resources, governance and organisational arrangements in place, commensurate with enabling the sustainability product to achieve its sustainability objective;

   2. (b)

      there is adequate knowledge and understanding of the assets in which the sustainability product is invested; and

   3. (c)

      there is a high standard of diligence in the selection of any data or other information used (including when third-party ESG data or ratings providers are used) to inform investment decisions for the sustainability product; and

8. (8)

   in relation to investor stewardship:

   1. (a)

      identify the investor stewardship strategy needed to support the achievement of the sustainability product’s sustainability objective, including the activities which are expected to be undertaken and the outcomes which are expected to be achieved; and

   2. (b)

      ensure that the investor stewardship strategy and appropriate resources are applied in order to support the achievement of the sustainability objective.

1A manager must, with respect to a sustainability product that is an index-tracking product, only use an index that has a methodology which is aligned with the product’s sustainability objective and the requirements in ESG 4.2.4R(2).

1A manager must, in addition to the general criteria under ESG 4.2.4R to ESG 4.2.11R, ensure that a sustainability label is only used in relation to a sustainability product if the product meets the specific criteria applicable to that label.

1A manager may only use the ‘sustainability focus’ label where the sustainability product’s sustainability objective is consistent with the aim of investing in assets that are environmentally and/or socially sustainable, determined using the robust, evidence-based standard set out under ESG 4.2.4R(2)(b).

1A manager may only use the ‘sustainability improvers’ label where the sustainability product’s sustainability objective is consistent with the aim of investing in assets that have the potential to improve environmental and/or social sustainability over time, determined by the potential of those assets to meet the robust, evidence-based standard set out under ESG 4.2.4R(2)(b).

1A manager must, in relation to the use of the sustainability label ‘sustainability improvers’:

1. (1)

   identify the period of time by which the product and/or the assets in which the product invests is expected to meet the robust, evidence-based standard set out under ESG 4.2.4R(2)(b);

2. (2)

   identify short and medium-term targets for improvements in the sustainability of the product and/or the assets in which the product invests, commensurate with the investment horizon of the product; and

3. (3)

   obtain robust evidence to satisfy itself that the assets in which the product invests have the potential to meet the robust, evidence-based standard set out under ESG 4.2.4R(2)(b).

1A manager may only use the ‘sustainability impact’ label where the sustainability product’s sustainability objective is consistent with the aim of achieving a pre-defined, positive, measurable impact in relation to an environmental and/or social outcome.

1A manager must, in relation to the use of the sustainability label ‘sustainability impact’:

1. (1)

   specify a theory of change in line with the product’s sustainability objective, describing how the manager expects its investment activities and the product’s assets to contribute to achieving a positive and measurable impact, in accordance with the robust, evidence-based standard set out under ESG 4.2.4R(2)(b) where the manager considers it appropriate; and

2. (2)

   specify a robust method to measure and demonstrate that the manager’s investment activities and the product’s assets are achieving a positive environmental and/or social impact.

1A manager may only use the ‘sustainability mixed goals’ label where the sustainability product’s sustainability objective is to invest in accordance with 2 or more of the sustainability objectives in ESG 4.2.13R, ESG 4.2.14R and ESG 4.2.16R.

1A manager must, in relation to the use of the sustainability label ‘sustainability mixed goals’:

1. (1)

   identify the proportion of assets which are invested in accordance with each of the 2 or more sustainability objectives referred to in ESG 4.2.18R; and

2. (2)

   meet the requirements (as relevant) under ESG 4.2.15R and ESG 4.2.17R.

1A manager must ensure that the general and specific criteria with respect to using a sustainability label are met on an ongoing basis, in particular:

1. (1)

   The manager must ensure that:

   1. (a)

      the requirements in ESG 4.2.4R continue to be met;

   2. (b)

      the sustainability product’s investment policy, strategy and escalation plan under ESG 4.2.9R(2) and ESG 4.2.9R(6) are updated as appropriate;

   3. (c)

      the independent assessment obtained under ESG 4.2.9R(3) remains valid;

   4. (d)

      the manager continues to maintain appropriate governance and resources in accordance with the requirements under ESG 4.2.9R(7); and

   5. (e)

      the manager continues to maintain an appropriate investor stewardship strategy and apply that strategy and its resources in accordance with the requirements under ESG 4.2.9R(8); and

2. (2)

   The manager must:

   1. (a)

      monitor whether pursuing the sustainability product’s sustainability objective could result in negative outcomes that have not already been identified under ESG 4.2.9R(1).

   2. (b)

      monitor whether the sustainability product is investing in assets that pursue its sustainability objective and identify any new assets that have not already been identified under ESG 4.2.9R(4); and

   3. (c)

      monitor the ongoing performance of the sustainability product in achieving its sustainability objective, measured against the product’s KPIs set out under ESG 4.2.4R(3).

1A manager must, in relation to a sustainability product that is an index-tracking product, ensure that the index continues to meet the requirements of ESG 4.2.4R(2) when that index is rebalanced.

1. (1)

   1A manager must, when ensuring the matters set out in ESG 4.2.20R are met:

   1. (a)

      apply, as appropriate, its escalation plan under ESG 4.2.9R(6) where the product’s assets do not demonstrate sufficient performance against the product’s sustainability objective and/or the KPIs under ESG 4.2.4R(3); and

   2. (b)

      subject to ESG 4.2.25R, ensure that, if a sustainability product ceases to meet the general or specific criteria with respect to using a sustainability label, it takes action to restore compliance as soon as reasonably practicable.

2. (2)

   A manager that is undertaking the steps set out in ESG 4.2.22R(1) will be complying with the general and specific criteria with respect to using a sustainability label.

1A manager must, where the steps taken under ESG 4.2.22R are not sufficient for ensuring ongoing compliance with the general and specific criteria:

1. (1)

   revise or cease the use of a sustainability label as soon as reasonably practicable; and

2. (2)

   take the steps set out under ESG 4.1.13R.

1Where a manager uses a sustainability label in relation to a sustainability product, it must take reasonable steps to ensure that the data it is relying upon in order to meet the requirements under ESG 4.2 is accurate and complete (including using proxies and assumptions where appropriate).