The UK SDR (sustainability disclosure requirements) regulations have been introduced with the stated goal of increasing transparency on the sustainability goals and features of products and reduce the risk of harm from greenwashing[1] amongst the thriving sustainable investment space. We can see this becoming all the more important in the future, as global AUM in ESG-oriented funds is set to hit roughly $34 trillion by 2026[2]. The FCA sees this as an opportunity not only increase transparency and minimise risk but also as a golden chance to establish the UK as a global leader in the sector. Due to our strong position in Europe, which according to a Bloomberg report[3], is set to continue be the global front-runner.
These changes were initially put forwards in October 2022, however the core changes begin to start implementation from the 31st of July 2024. The UK has sought to implement these regulatory adaptations in response to ideas such as the SFDR (Sustainable Finance Disclosures Regulations) in the EU, and a paper written by the UK Government in 2021, “Greening Finance: A Roadmap to Sustainable Investing”[4] which first introduced the idea of SDR regulations.
The three key areas that the SDR regulations choose to focus on are: anti-greenwashing rules, sustainability labels, and product- and entity-level disclosures.
Anti-Greenwashing Rules
Proposed to ensure that the sustainability-related claims made by authorised firms about their products are transparent, fair and not misleading. This applies to all communications about these products that make reference to sustainability characteristics either visually or in writing.
These references to sustainability characteristics includes the use of the following terms such as – “climate”, “sustainable” or “Paris-aligned” etc that mustn’t appear on a website or financial promotions etc unless a label or an appropriate disclosure is being utilised. Additionally a reference could be visual as, previously mentioned, for example a photo of trees or a wind farm that implies that the product has sustainability characteristics.
Sustainability Labels
The introduction of the sustainability labels on the 31st of July seeks to help investors identify and trust investments that aim to promote positive environmental or social outcomes.
- Sustainability improvers – Focuses on assets with the potential to become sustainable in the future, that may not currently be sustainable.
- Sustainability impact – Designed for products that invest in solutions to genuine issues and that could lead to a real-world positive impact.
- Sustainability mixed-goals – Intended for products that are formed of some combination of the above two labels.
- Sustainability focus – Requires at least a 70% allocation to assets that are already sustainable for people and the planet.
When using a label, both short- and medium-term targets must be established, as for example, if assets under the ‘sustainability improvers’ label are not performing as expected, they must be able to identify it and have a pre-defined action plan for this instance.
With these initial changes, only UK-domiciled funds and FCA authorised firms – such as distributors or those involved in distribution activities – are impacted. Firms must review their sustainability products with regard to the labels and prepare disclosures where they are necessary. In addition, all marketing materials should be closely reviewed in order to ensure that their content could not be viewed as misleading.
If a product is using one of the four labels, then certain disclosures must be provided on both a pre contractual and on an annually recurring basis. They are designed to provide detail on the sustainability characteristics of the products being offered. On the 31st of July, from when the labels come into effect, disclosures must also be made to accompany them.
In addition, should the firm have an AUM greater than £5 billion, a “Sustainability Entity Report” must be produced. This is a disclosure which documents how sustainability related risks and opportunities are being managed. It is a part of the entity level disclosures that initially is only for firms with an AUM greater than £50 billion whereby it comes into effect from the 2nd of December 2025, and for firms with an AUM greater than £5 billion this Is extended to cover them as of the 2nd of December 2026.
These changes may require firms to shift their asset allocations in order to better align with the investment labels and make changes to their marketing approaches and materials to comply with the anti-greenwashing rules. These rules have in fact already come into effect as of the 31st of May 2024, and to help ease with this transition, Laven has worked closely with Leo to reflect these changes in compliance with updated financial promotion and target market templates, alongside comprehensive future monitoring of Lavens’ ARs.
The FCA has clearly outlined their intention to continue to scale the SDR regime beyond what has been initially posed. In this expansion they aim to encapsulate overseas funds, portfolio management and pension related products. With this they aim to create a level playing field for all sustainability focused products that are marketed in the UK.
With the implementation of these regulatory changes, a step in the right direction has definitely been made in ensuring that transparency and trust has been established in the sustainable investment sector. These regulations should not only enhance the credibility, and trustworthiness of sustainability investments in the UK but also position the UK in a position to become internationally competitive in the sector.
The FCA plans to continue to refine and update these disclosure requirements in line with international standards and global best practices.
[1] PS23/16 Sustainability Disclosure Requirements (SDR) and investment labels.
[2] Asset managers globally are expected to increase their ESG-related assets under management (AUM) to US$33.9tn by 2026.
[3] Global ESG assets predicted to hit $40 trillion by 2030, despite challenging environment, forecasts Bloomberg Intelligence | Press | Bloomberg LP
