Understanding the New FCA SDR Labels: A guide for investors
Risk warning - Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you are unlikely to be protected if something goes wrong.
This communication is only intended for Investment Professionals, Professional Investors, Certified High Net Worth and Self-Certified Sophisticated Investors.
The FCA is stepping up its efforts to ensure investors have access to reliable, easy-to-understand data. One of its latest initiatives is the introduction of the Sustainable Disclosure Requirements (SDR).
In this blog, we’ll dive into what these new FCA SDR labels are, what they mean for investors, and how they aim to improve the sustainability and responsibility of financial products and the OnePlanetCapital view on these changes.
What are the new Sustainability Disclosure Requirements (SDR)?
The Sustainable Disclosure Requirements (SDR) are a set of rules introduced by the Financial Conduct Authority (FCA) aimed at enhancing transparency in sustainable investment products. These labels are designed to help investors identify products that meet certain sustainability criteria, ensuring that claims about "sustainable" or "green" investments are clear and verifiable.
Under the SDR framework, asset managers, pension providers, and other financial product providers will be required to display labels on their sustainable investment products. These labels will indicate the level of sustainability of the product and the types of environmental, social, and governance (ESG) factors that are considered.
The FCA’s main objectives and changes coming from this policy are;
To promote anti green-washing
This is self-explanatory (although I am not sure these labels themselves will stop greenwashing.) - ‘ FCA authorised firms are to reinforce that sustainability-related claims must be fair, clear and not misleading.’
New labels for those funds which apply
There are 4 new labels for funds to elect from to market their funds and which category they fall into. To qualify for a label, a product must have a sustainability objective that is clear, specific and measurable, and part of the product's investment objectives
Re-naming of funds that do not qualify for these labels
All funds that allude to impact, ethical, green or sustainable will have to rename if they cannot qualify for one of the four labels.
What are the different labels?
To achieve one of the four labels the funds must have sustainability objectives (i.e. improve or pursue a positive 'E' or 'S' outcome) and at least 70% of its assets must align with that objective. In the FCA's words, "investment strategies such as exclusion or negative screens, ESG integration or basic ESG tilts alone would not be enough to qualify for a label".
No longer will negative only screening funds be able to use language such as; impact, green or sustainability.
Eligibility requirements
All funds using a label must satisfy the "specific" criteria pertaining to each label (below) 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 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.
Label 1 Sustainability ImpactSustainability 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 and the investor's contribution.
To support assets in delivering positive impact.
Label 2 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 assets in the fund's portfolio.
To support assets in remaining sustainable and deliver long-term growth.
Label 3 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 sustainability improvements in assets held in the fund's portfolio.
To support improvements and accelerate these over time.
Label 4 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 goal.
The full policy breakdown can be seen here
https://www.fca.org.uk/publication/policy/ps23-16.pdf
Contact:
Matthew Jellicoe
Investment Director