A new report on how asset managers can best implement the FCA’s Sustainability Disclosure Requirements (SDR) has been published.
The report, published by the UK Sustainable Investment and Finance Association (UKSIF) and PwC, sets out a list of recommendations for firms on how to respond to the challenges and opportunities brought about by the regulation.
The first is to carefully consider what label, if any, to apply to products under the SDR, taking into “account any commercial benefits as well as client and stakeholder expectations and perceptions around labelled and unlabelled products.”
Secondly, firms should focus on demonstrating compliance with the 70% threshold.
The FCA announced that, to be categorised as an environmental, social and governance (ESG) fund, it must hold at least 70% of the product’s assets “which meet a credible standard of environmental, social sustainability, or align with a specified environmental theme”.
The report also urges firms to step up engagement with distributors at the earliest opportunity to ensure they are comfortable with the core sustainability features of each product.
Additionally, firms should apply a firm-wide greenwashing review and focus sustainability reporting on what is most relevant and material.
The report also recognised the implications of the SDR will be felt more widely than just the asset management sector, as financial advisers and investment platforms will also be impacted.
Numerous firms said they appreciated the opportunity SDR presents “to validate and demonstrate their sustainability leadership and strategies”.
PwC UK partner David Croker said: “The FCA’s SDR package represents a significant development in the UK’s sustainable finance regulatory framework, bringing with it wide-ranging impacts on the asset management sector.
“It will shape how UK asset managers develop sustainable investment products, ensure that sustainability-related claims stand up to scrutiny, and report on the sustainability credentials of their investments.
“As asset managers continue to grapple with evolving sustainable finance regulation globally, it will be important for them to take a strategic view of the SDR package to help manage challenges around interoperability.
“This means implementing changes to their product governance and sustainability reporting in a way that reflects their broader firm-wide strategy on sustainability, helping to preserve and create value for their organisation alongside regulatory compliance.”
UKSIF CEO James Alexander added: “We are committed to supporting our members to take full advantage of the opportunities of the FCA’s SDR and help guide them through this first crucial year of implementation.
“This regulation can empower our members to better demonstrate and evidence their sustainable investment approaches and strategies in an environment where consumers are increasingly looking to put their money into funds that more closely align with their values.
“Working with our members, we want to ensure that consumers can access clear and consistent information on the sustainability characteristics of financial products.
“Whilst the SDR fund labels are not mandatory, they aim to encourage more consistent disclosure between firms, improve product comparability for retail investors and, in turn, allow consumers to make more informed choices when it comes to sustainable investments.”
The FCA published the SDR rules in November 2023. The main aim behind the SDR is to “improve the trust and transparency of sustainable investment products and minimise greenwashing”.
The SDR rules will see four labels introduced to sustainable funds, ‘sustainable focus’, ‘sustainable improvers’ ‘sustainable impact’ and ‘sustainability mixed goal’.
