The UK's SDR: which sustainability labels can fund managers use?
Published on 12th Mar 2024
Funds using labels will have a marketing advantage when raising capital from investors with sustainability mandates
The Financial Conduct Authority (FCA) published its much-anticipated policy document in November last year setting out the core components of its new sustainability disclosure requirements (SDR) and investment labels regime and who it will impact.
For sustainable funds, the question fund managers now need to consider is whether they wish to opt in to using a SDR label for each fund and, if so, which one?
What sustainability labels can fund managers use?
Fund managers authorised by the FCA will be able to use four mutually exclusive types of product labels. The labels represent different objectives so different investment approaches must be taken when pursuing these objectives.
Source: FCA's Policy statement 23/16, page 98
These logos can be used to market individual UK-domiciled funds to retail and professional investors alike, providing the FCA is notified by the fund manager in advance of applying the label. The labels are available for use without separate authorisation from the FCA, but are subject to the fund manager complying with initial and ongoing eligibility criteria.
Eligibility requirements
All funds using a label must satisfy the "specific" criteria pertaining to each label and the "general criteria" for example:
- The fund must have an explicit sustainability objective as part of its investment objectives that both aligns with one of the sustainability labels and is clear, specific and measurable.
- As a main rule, at least 70% of the gross value of the product’s assets is invested in accordance with its sustainability objective.
- The product has robust and evidence-based key performance indicators (KPIs) that can demonstrate the product’s progress towards meeting its sustainability objective.
What are the key attributes of each label?
- Sustainability Focus
The "sustainability focus" label is for funds that mainly invest in assets that focus on sustainability for people or the planet.
Sustainability standard
Specific criteria
How key performance indicators (KPIs) are used
The role of stewardship
Focus funds indirectly pursue positive environmental or social outcomes or both by investing in assets that meet a robust, evidence-based standard of sustainability. The fund’s sustainability objective must be consistent with the aim of investing in assets that are environmentally or socially sustainable or both and are selected by applying a robust, evidence-based standard.
KPIs must be used to measure the sustainability of the assets held in the fund's portfolio.
To support assets in remaining sustainable and deliver long-term growth.
- Sustainability Improvers
The "sustainability improvers" label is for funds that mainly invest in assets that may not be sustainable now, with an aim to improve their sustainability.
Sustainability standard Specific criteria How key performance indicators (KPIs) are used The role of stewardship Improver funds indirectly improve positive environmental or social outcomes or both by investing in assets that have the potential to meet a robust, evidence-based standard of sustainability.
The fund's sustainability objective must be consistent with the aim of investing in assets that have the potential to improve environmental or social sustainability or both over time selected by the potential of those assets to meet a robust, evidence-based standard.
KPIs must be used to measure the sustainability improvements of the assets held in the fund's portfolio.
To support improvements and accelerate these over time.
- Sustainability Impact
The "sustainability impact" label is for funds that mainly invest in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet.
Sustainability standard Specific criteria How key performance indicators (KPIs) are used The role of stewardship Impact funds directly pursue positive environmental or social outcomes or both through both the fund manager's investment activities and the sustainability characteristics of the assets.
The fund's sustainability objective must be consistent with the aim of achieving a pre-defined, positive, measurable impact in relation to an environmental or social outcome or both.
Managers must specify a theory of change describing how the manager expects the fund's investment activities and assets contribute to achieving a positive and measurable impact.
Managers must also specify a robust method to measure and demonstrate that the fund is achieving this.
KPIs must be used to measure the positive impact of both the assets held in the fund's portfolio as well as the investor's contribution.
To support assets in delivering positive impact.
- Sustainability Mixed Goals
The "sustainability mixed goals" label is for funds that mainly invest in assets that are a mix of the three first labels.
Sustainability standard Specific criteria How key performance indicators (KPIs) are used The role of stewardship Mixed goal funds both directly and indirectly pursue or improve positive environmental or social outcomes or both in the same manner as the first three labels.
The fund's sustainability objective must be consistent with the aim of each of the first three labels.
KPIs are used in the same manner as the first three labels in relation to each goal.
Stewardship applies in the same manner as the first three labels in relation to each goals.
When will the labels be available?
Fund managers can use a label for each of their funds from the 31 July 2024.
What next?
If relevant, fund managers will need to assess whether the regulatory burden of meeting the requirements to use a label is proportionate to the marketing benefit of doing so. The relevant compliance policies and procedures will need to be put in place to ensure that the criteria to use the label are met and continue to be met, on an ongoing basis.
If fund managers choose to use a label, this must be notified to the FCA. This is done through their online notification and application system, known as "Connect".
Osborne Clarke comment
The effect of the SDR regime is to force funds managers into either abstaining from using terms in fund names or any financial promotions that imply that a fund made available for retail investors has environmental or social characteristics, or following the SDR's rules when doing so. Where funds need to provide significant SDR disclosures anyway, if using such terms in their name or financial promotions, fund managers need to consider carefully whether it's worth going "all in" and labelling the funds.
Funds using labels will have a significant marketing advantage when raising capital from investors with sustainable mandates. This includes institutional investors, as the combination of a recognisable brand that requires compliance with clear eligibility criteria enshrined in legislation will greatly facilitate the deployment sustainable capital.
As sustainable investing is here to stay, it is worthwhile for fund managers to consider now what commercial benefits could be reaped by being an early mover, planning what steps need to be taken and labelling their sustainable funds sooner rather than later.
