Cristian Angeloni (pictured), Special Projects Editor at Investment Week
Today (2 December) marks the long-awaited implementation date for the Sustainability Disclosure Requirements’ (SDR) naming and marketing rules, where all firms authorised by the Financial Conduct Authority and subject to the regime will need to either adopt one of the four labels and/or produce disclosures and statements for the marketing of products.
Firms have already been subject to the regulator's anti-greenwashing rules - which came into effect on 31 May 2024 - to ensure any claims of sustainability either in their products or services are "clear, fair and not misleading".
Since the introduction of the labelling regime on a voluntary basis on 31 July 2024, there have been so far 29 funds and four investment trusts - and counting - to have publicly disclosed their adoption of one of the four SDR labels: namely, ‘Sustainability Impact'; ‘Sustainability Focus'; ‘Sustainability Improvers' and ‘Sustainability Mixed Goals'.
'Not easy but doable': The implications of adopting an SDR label
Of the 33 strategies, 22 have adopted the Sustainability Focus label, while 11 opted for Sustainability Impact. However, no mention of Sustainability Improvers nor Mixed Goals has been publicly disclosed as of yet.
This is despite campaigners arguing that, as we transition to net zero and a greener economy, Improvers funds have a key role to play investing in assets that may not be sustainable now, but aim to improve their sustainability in the future.
As many fund managers running these funds have highlighted to me lately, in the quest for palatable returns for some clients, there is also potentially more money to be made in helping shift a company from a ‘not-so-good' status to ‘good', than investing in an already ‘good' company from a sustainability perspective.
However, perhaps the later adoption of Improvers and Mixed Goals labels is not surprising, considering the issues already faced by the industry when applying for less controversial labels.
It is no secret that asset managers have had their fair share of issues trying to get the thumbs up from the FCA in order to adopt a label, as a myriad of firms have been lamenting being left in the dark due to the regulator's non-prescriptive approach to the labelling regime.
According to WHEB Asset Management managing director George Latham, the challenges SDR has posed for asset managers arose as it is "very different" from its European counterpart, the Sustainable Finance Disclosure Regulation (SFDR), which was introduced with an inherent prescriptive nature.
FCA to allow 'temporary flexibility' on SDR naming and marketing rules
Firms hoping SDR would mirror this have quickly had their hopes quashed, as the FCA has adopted a stance similar to Consumer Duty, with a principles-based approach. This means "you are not given the answers" by the regulator during the application process, Latham told me.
In fact, it took WHEB AM as many as 20 drafts of the prospectus for its Sustainability fund, before the FCA exhausted all questions and clarifications on the matter.
It is important to highlight, however, that the FCA does not approve the label per se. Rather, the FCA approves the prospectus, after which point the asset manager can then claim the label for the fund(s) in question.
WHEB's first draft was submitted at the end of March 2024. Since the application process is supposed to take 30 days, the regulator encouraged the firm to withdraw and then resubmit its application to keep the process going, Latham explained. The green light was then given at the end of August, for a September launch.
One matter of note, he told me, was the FCA's desire for a "clear narrative" throughout the fund's prospectus, with the strategy's objective as a starting point and a coherent flow throughout the documents.
WHEB AM was among the first two asset managers to have their prospectuses approved by the FCA, alongside AEW for its UK Impact fund – both of which adopted a Sustainability Impact label as a result.
Edward Long, portfolio manager at AEW, relayed a similar experience to Latham, telling me that it took a "number of iterations" of the prospectus before it was finalised, but he also highlighted that the regulator has been "helpful and collaborative throughout".
Most of the FCA's doubts surrounded the need for greater detail on the measurement of impact and disclosure. In fact, Latham told me WHEB's prospectus started with three pages and ended up with 15 once the process was concluded.
Sacha Sadan addresses SDR label frustration in defence of FCA's 'non-prescriptive' approach
In October, the FCA's director of ESG, Sacha Sadan, defended the watchdog's non-prescriptive approach to SDR, as he argued it was not the regulator's intention to tell firms what to do, rather it wanted asset managers to set their own standards and then provide explanations for them.
Yet it may be that setting these standards under the Improvers or Mixed Goals labels could have been perceived as more complex than anticipated.
Interestingly, the FCA added the fourth label – Mixed Goals – in November 2023 at the industry's request, noting it could "accommodate" products that invest in a mix of sustainable assets or that have the potential to improve their sustainability over time or that aim to achieve a positive impact. Asset managers had found this lacking in the FCA's original proposals, featuring only three labels.
Even though the FCA has frequently spelled out that the aim of SDR is to improve consumer trust and confidence in the sector, as well as to provide clarity around sustainable investing, a recent study by Research in Finance showed this may be difficult to achieve.
In fact, a cluster of 30 polled private investors argued the presence of a label actually added "very little value" to the sustainability credentials of a fund, as they called for a greater focus on "tangible facts and figures".
Interestingly, Sustainability Focus and Sustainability Mixed Goals were singled out as being too "vague", with the latter being perceived as not having sustainability at its core.
Sustainability Impact and Sustainability Improvers, on the other hand, were highlighted as the clearest and as those with the most measurable impact among the four.
Lack of clarity keeps retail investors from getting on board with SDR labels
It may well be that asset managers have already submitted their prospectuses in relation to either Improvers or Mixed Goals labels, as the FCA granted a four-month extension to asset managers.
The extension did not apply to everyone however, as there were strict criteria to abide by in order to receive the four extra months and extend the deadline to 2 April 2025.
These included having submitted an application by 1 October 2024 and using terms such as ‘sustainable', ‘sustainability', ‘impact' or any variations of the three in the fund name, or looking to include them in the name.
At the same time, several funds decided to take a step back from the SDR labelling process by removing all mentions of sustainability either from the fund name, the investment objective and philosophy, or both.
So far, at least 20 strategies have taken a step away from the sustainability regime, including funds, investment trusts and indices, with Hawksmoor suspending its Sustainable World services to new clients and MSCI ditching the ESG label for four of its indices.
Stewart Investors also decided to distance itself from the labelling regime in September, telling investors that companies can contribute and benefit from sustainability in a number of different ways.
FCA SDR implementation policy for portfolio management to be delayed to Q2 2025
The current situation does not make things any easier for portfolio managers, who still await clarity on how SDR will impact and apply to them.
In September, Investment Week revealed the FCA had delayed the publication of the implementation policy for portfolio managers until Q2 2025.
We all know the SDR journey is far from over, with at least two more deadlines set for the next couple of years: 2 December 2025 for the ongoing product-level entry and disclosure for firms with more than £50bn AUM and 2 December 2026 for the entity-level disclosure rules for firms with over £5bn AUM.
Without knowing the actual number of managers and funds being granted the four-month extension, it is also hard to forecast how many will finally adopt the labels and which type, and how many will remain label-less.
Last year, ahead of the publication of the SDR Policy Statement, the FCA told journalists it expected around 630 funds to fall under the regulation's remit, and forecast 45% to use a label when the regime came into force.
That would have been around 283 funds.
As of today, the number of labelled funds stands to account for just over 11% of the FCA's forecast.
