The onset of the Sustainability Disclosure Requirements presents a major overhaul in the way sustainability-based investments are labelled, marketed and reported in the UK.
With recent questions around greenwashing beginning to seep into the wider narrative of sustainable investing and key end goals such as net zero, some would say this is a timely intervention.
And while the SDR sits alongside similar regulations, such as the Sustainable Finance Disclosure Regulation introduced in the EU in 2021, it offers the most precise set of rules and forward-thinking framework we have seen for the UK’s sustainable investment markets yet, with a robust set of benchmarks for end consumers to judge the market.
In this sense, the regulations have the potential to transform the way in which capital is allocated to the goal of net zero.
But as with the introduction of any significant new legislation, the SDR brings both opportunities and challenges for wealth managers and advisers alike. Ahead of the July 31 starting gun for labelling, below we set out the need-to-know details, as well as the steps companies should be taking to prepare.
The SDR in a nutshell
Bringing it back to basics, the SDR is a new set of regulations and broader efforts from the Financial Conduct Authority to improve trust and transparency in the sustainable investment fund market, while mitigating greenwashing concerns for investors.
The new regime includes an anti-greenwashing rule that applies to all products and services operating via a UK company as a manufacturer or distributor, while the labelling, naming and marketing aspects only apply to UK-domiciled funds. That said, it is expected that the regime may be extended to offshore funds being distributed in the UK at some point in the future.
There are several components and series of steps to the SDR. The first, the new anti-greenwashing rule, came into effect on May 31 2024. The other rules come into full effect on December 2 2024.
The different sustainability labels
One of the key components is fund labelling. This introduction of fund labels is a first for the UK, whereas national labels have existed in European countries such as France and Belgium for many years.
The FCA created four sustainability labels to help consumers navigate the market, identify products that meet their needs and preferences and compare different products more effectively and efficiently.
UK companies will be able to start using these labels from July 31 2024:
- Sustainability Focus
- Sustainability Improvers
- Sustainability Impact
- Sustainability Mixed Goals
There are general and label-specific criteria that must be met at a product and company level for the relevant products to qualify for a label. These include:
- sustainability objective that forms part of its investment objective
- investment policy and strategy
- key performance indicators
- resources and governance
- stewardship
For asset managers, if a fund has certain naming conventions it either needs to have a clear sustainable label by December 2 2024, or changes must be made to the fund’s name or composition.
Then there is a new disclosure element for labelled funds that must be formatted as a two-page consumer-facing document, again to be produced by December 2 2024.
There will also be new top-level fund reporting requirements that come into effect one year from the application of a new label. If, for instance, a fund receives a label in August 2024, the company will be obliged to provide their first fund level report in August 2025.
