The SDR regulation and what it means for investors in the UK

The Sustainability Disclosure Requirements (SDR) regulation which has recently been introduced by the UK's Financial Conduct Authority (FCA) is a landmark policy intended to drive decision-useful information on sustainability and promote consistent disclosure across the value chain.

This disclosure framework has sparked robust debate within our industry on impacts across costs, processes, innovation and ultimately, societal and environmental benefit. Opinions diverge, yet business-as-usual is proving inadequate to address intensifying social and environmental challenges that threaten economic stability itself.

We'll provide an overview of the key aspects of the SDR regulation and what it means for investors in the UK.

Introducing the SDR Regulation

After years of lofty principles lacking accountability, the SDR signals intention translating into action: It introduces a package of measures to inform and protect retail investors, and to improve trust in the market for sustainable investments. The main components can be broadly summarised as follows: 

• ‍Sustainability labels: Four voluntary labels will be available for investment products — Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals. The labelling system helps end-investors easily identify and compare funds based on their sustainability characteristics and strategies.‍
• Disclosures: Enhanced pre-contractual and ongoing disclosures will provide granular information to investors on aspects like a fund’s sustainability objectives, investment strategy, methodology, and impact.‍
• Anti-greenwashing rules: Rules to prohibit all regulated firms from making misleading or exaggerated or un-evidenced ESG and sustainability-related claims, protecting investors from greenwashing.‍
• Other requirements:  Additional rules around naming conventions, such as marketing materials and website disclosures to prevent misleading investors.

Benefits for Investors

The SDR aims to bring several advantages for retail investors in sustainable funds and products:

• ‍Increased transparency: Disclosure requirements will make more sustainability-related information readily available, enabling more educated decision making.‍
• Reduced greenwashing risk: Anti-greenwashing rules aim to help investors avoid funds that overstate or misrepresent their sustainability efforts.‍
• Greater trust: Standardised labelling and disclosure norms aim to empower investors with greater clarity and confidence in making informed decisions about their     sustainable investments.‍
• Easier comparison: The categorisation of funds under different sustainability labels allows for easier comparison between investment options.

 In summary, the SDR framework empowers investors to make investment choices aligned with their values and objectives around sustainability. 

Timeline and Current Status

The FCA published its final policy statement on the SDR regulation in November 2023, cementing the rules and timeline after industry consultations. Asset managers now have a set period to align internal processes before the anti-greenwashing obligations kick in.

Some key dates in the SDR implementation timeline are:

• May 31, 2024: The  anti-greenwashing rule comes into effect, applying to all firms that make sustainability-related statements.
• July 31, 2024: Investment managers can start using the four sustainability labels for their funds, accompanied by relevant product-level and website disclosures.
• December 2, 2024: Rules around naming conventions and marketing materials for labelled funds come into force.
• December 2, 2025 and 2026: Phased implementation of enhanced ongoing periodic disclosures at the product and entity level based on assets under management.

Key Aspects of the Regulation

Let's look at some of the key aspects of this regulation in more detail:

Sustainability Labels and Disclosures

One major innovation under the SDR is the introduction of four voluntary sustainability labels that funds can use if they meet defined criteria:

• ‍Sustainability Focus: For funds investing mainly in assets that focus on sustainability for people or the planet.‍
• Sustainability Improvers: For funds investing mainly in assets that may not be sustainable now, with an aim to improve their sustainability.‍
• Sustainability Impact: For funds investing mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet.
• ‍Sustainability Mixed Goals: Applies to funds investing mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet.

These labels aim to provide an intuitive categorisation to guide investor choice. They are underpinned by a set of criteria, summarised below:

Sustainability objective: All products must have a sustainable investment objective to improve or pursue environmental and/or social outcomes as part of their investment objectives. Firms must also identify and disclose whether pursuing the sustainable investment objective may result in material negative outcomes;

Investment policy and strategy: At least 70% of the product's assets must be invested in accordance with its sustainability objective, whilst firms must also disclose and explain any other assets held in the product for other reasons;

KPIs: Firms must identify KPIs to measure progress against the sustainability objective;

Resources and governance: Firms must ensure there are appropriate resources, governance and organisational arrangements to support delivery of the sustainability objective; and

Stewardship: Firms must identify and disclose the stewardship strategy needed to support the delivery of the sustainability objective.

Stewardship Expectations in the SDR

It appears that the FCA - through the SDR - aims to promote stewardship practices among firms in scope with more linkage between stewardship and investment activities, beyond what has been typical thus far.

For the use of any label firms must identify and apply the investor stewardship strategy and resources needed to support achievement of the fund’s sustainability objective, including the activities the firm expects to undertake and outcomes it expects to achieve. However, there are no prescriptive requirements on how to pursue stewardship as part of a strategy and no expectation to demonstrate a causal link between stewardship activities and outcomes.

Stewardship seems interpreted in a broad sense encompassing not just voting and engagement but also wider shareholder accountability efforts.

‍The voluntary Sustainability Improver label

Stewardship plays a key role in this category. Firms’ investor stewardship strategy should support delivery of the objective and therefore help to accelerate improvements in environmental and/or sustainability factors.

• The sustainability objective must be consistent with an aim to invest in assets that have the potential to improve environmental and/or social sustainability over time – determined by their potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability.
• Firms will need to identify the period of time by which the product and/or its assets are expected to meet the standard, including short and medium-term targets.
• They must also obtain robust evidence to satisfy themselves that the assets have the potential to meet the standard.
• Firms’ investor stewardship strategy should support delivery of the objective and help to accelerate improvements in sustainability over time.
• KPIs must be relevant to the product’s sustainability objective and are therefore not prescribed. As with all labels, KPIs can demonstrate progress of the product or individual assets towards the sustainability objective.

Anti-Greenwashing Rules

The FCA will also enforce anti-greenwashing rules from May 31, 2024,across FCA-authorised firms, covering sustainability-related statements across areas like marketing materials, financial promotions, product labels, and fund names.

This includes requirements such as:

• Claims must be clear, fair, and not misleading.‍
• Firms must explain the basis of any sustainability statements.‍
• Disclosures should allow investors to easily evaluate claims.‍
• Statements should represent a firm's practices appropriately.

Applicability and Scope

The SDR applies only to FCA-regulated asset managers and UK-domiciled funds and the anti-greenwashing rule applies to all FCA-regulated firms. Overseas funds marketed in the UK do not fall under its purview as of now but will be included later.

The requirements for the entity reporting are being implemented in a phased manner based on assets under management. For instance, managers with over £50 billion AuM will need to meet the first phase of enhanced disclosures by Dec 2025 while smaller managers get an additional year.

Are you ready? 

The SDR symbolises the intention towards more accountability in ESG claims, putting the UK at the forefront of regulating this rapidly evolving domain.

As an investment manager, do you intend to embrace the SDR to strengthen your sustainable investment integrity? With Impactive's stewardship management platform you can seamlessly implement engagement targets and tracking and link these to ESG integration processes to evidence your SDR compliance and reporting. Contact us today for more information.