It has almost been a year since the first set of requirements of the Sustainability Disclosure Requirements (SDR) and Investment Labels regime came into force.
At this point in the year, in-scope firms are advised to take stock of where they are against the expectations and rules already in place and where follow up action may be required.
Anti-greenwashing rule
All authorised firms need to ensure that any references to sustainability are fair, clear, and not misleading and are true and proportionate to the actual sustainability profile of the product or service.
This applies when communicating to clients and when presenting information to the public, for example via websites.
By now, we would expect firms to have implemented an anti-greenwashing review into its existing process for reviewing and approving client communications, including financial promotions, and public facing information on the firm and its products and services.
This anti-greenwashing review should consider the additional helpful guidance that the Financial Conduct Authority issued in April 2024.
Another key point here is that we recommend firms consider whether there is appropriate challenge for the sustainability information and claims that are presented, such as from teams that are not too close to the process of designing and drafting the communications themselves.
Sustainability investment labels
From the 31 July 2024, in scope UK fund managers could begin to apply for a sustainability investment label for their UK domiciled in scope funds.
This February, the FCA announced that the number of funds planning to use a label under the SDR had climbed to over 100 notifications.
External reports on this have shown that the ‘sustainability focus’ label is the most popular option for managers, but the mixed goals label has not seen as much uptake.
Funds that successfully apply for a label must amend existing pre-contractual disclosures
Across the industry, we’re seeing an uptick in investors questioning around funds applying for a label or not, and so we would expect the number of label notifications to the FCA to continue increasing in 2025.
Funds that successfully apply for a label must amend existing pre-contractual disclosures to ensure this is up to date following the notification for a label to the FCA.
Naming and marketing
From the 2 December 2024, the naming and marketing requirements came into force along with the requirement for accompanying disclosures.
This part of the SDR certainly received mixed feedback from firms as many managers found that significant changes were needed to fund names, fund documents, and marketing materials to comply with the requirements.
As a reminder, the naming and marketing requirements not only impact labelled funds, but also non-labelled funds that use one or more of the FCA sustainability related terms in the name of the fund and/or financial promotions for the fund for retail clients.
The FCA noticed this challenge for firms and listened by offering temporary flexibility for firms that had submitted a completed application for approval of amended fund pre-contractual disclosures by 5pm on 1 October 2024, and is currently using one or more of the terms ‘sustainable’, ‘sustainability’ or ‘impact’ (or a variation of those terms) in the name of that fund and is intending either to use a label, or to change the name of that fund.
These firms now have until the 2 April 2025 to comply with the naming and marketing requirements. If your fund does not meet these conditions, then the FCA would have expected the naming and marketing requirements to have been met by the original December deadline.
The naming and marketing requirements are complex, especially where managers who have retail investment funds are needing to produce certain disclosures under the SDR to meet the requirements where any sustainability related terms are used for a non-labelled fund.
Disclosures
Managers who have labelled a fund or who intend to apply a label must ensure subsequent applications are made for changes to existing pre-contractual disclosures.
For ongoing sustainability disclosures (reports) for the fund, these must be published annually, covering a period of 12 months, with the first report due after 16 months (new extension instead of 12 months following Handbook notice 127) after the manager first starts to use a sustainability label or uses one or more sustainability related terms.
The FCA also requires firms to undertake an annual review of pre-contractual and consumer facing disclosures for the fund to ensure consistency with the use of a label or where it uses one or more sustainability related terms.
There are still unanswered questions in relation to the scoping of the SDR
The below deadlines are for in scope firms that must produce entity and product disclosures regardless of whether a label is applied or whether one of more of the sustainability related terms are used.
The 2 December 2025 deadline introduces ongoing (annual) product-level disclosures and entity level disclosures for firms with £50bn+ in AUM.
Lastly, 2 December 2026 introduces the first deadline for the annual entity-level disclosure for managers with £5bn+ AUM.
Uncertainty for scope
There are still unanswered questions in relation to the scoping of the SDR, particularly for overseas funds and for firms carrying out portfolio management activities.
The FCA confirmed in February that the extension of the SDR to portfolio managers will no longer be released in Q2 2025.
This is due to a variety of feedback received on how the labelling and disclosures requirements can viably apply to the types of bespoke products and services that portfolio/wealth managers offer to their clients.
On the application to overseas funds, this is still in progress with the FCA and HMT, however with the recent enforcement of the Overseas Fund Regime (OFR), and updates on the consultation process for the EU’s Sustainable Finance Disclosure Regulation (SFDR), we can hopefully expect an update later this year for what this means for the SDR.
Luke Murray is a senior consultant at Bovill Newgate
The post Bovill Newgate: Navigating the stepping stones of SDR appeared first on Money Marketing.
