SDR implementation: Overcoming the hurdles

30 October 2024 | UK & Europe | Articles

Since the FCA Sustainability Disclosure Requirements and Investment Labels, or SDR, came into force, important questions have been raised on the practical implementation of the regime. So far, we’ve seen the FCA amend its implementation timeline for certain requirements within the regime and fund managers have made difficult decisions particularly regarding the use of sustainability related terms used in fund names. All firms are now expected to have the anti-greenwashing rule implemented into their existing processes and governance, so it’s important that your setup is robust and future-proof.

Below is a summary of the FCA’s key implementation timeline for firms in scope of the SDR:

• 28 November 2023 – Publication.
• 31 May 2024 – Anti-greenwashing rule and guidance comes into force.
• 31 July 2024 – Firms can begin to use labels, with accompanying disclosures.
• 2 December 2024 – Naming and marketing rules come into force, with accompanying disclosures.
• 2 December 2025 – Ongoing product-level and entity-level disclosures for firms with AUM > £50bn.
• 2 December 2026 – Entity-level disclosure rules extended to firms with AUM > £5bn.

Effecting the anti-greenwashing rule

As a brief recap, the general anti-greenwashing rule (AGWR) requires all authorised firms to ensure references to sustainability (environment of social) characteristics truly reflect the actual sustainability characteristics of the product or service, and are fair, clear, and not misleading.

The FCA also published guidance around implementing the AGWR, providing examples of good and poor practice, and further expectations on what you need to consider when implementing the rule.

Although the rule may appear simple at face value, an honest review must be taken on the use of sustainability language, including images and / or graphics, for your products and services.
The below points highlight the actions we believe you should already be taking or considering:

• Reviewing relevant materials (marketing documents, websites, fact sheets) on products and services to comply with the AGWR.
• Updating existing review templates for the approval of financial promotions and other client communications, to ensure the AGWR is now considered within these checks. This should also include updating relevant policies and procedures.
• Training staff and senior management on the new requirements and changes made within your business.
• Outlining governance arrangements around your approach to anti-greenwashing.

Applying the sustainability investment labels

As we know, the SDR introduces four optional sustainability investment labels for fund managers in scope. The labels are:

• Sustainability Focus
• Sustainability Improvers
• Sustainability Impact
• Sustainability Mixed Goals

These labels are designed for products seeking positive sustainability outcomes and to present the investment profile offered by the product. For managers to use the label, a general and label-specific criteria must be met. These include having a type of sustainability objective and at least 70 per cent of the product’s assets invested in line with the sustainability objective. So far, the labels are only available to UK managers with UK AIFs and UCITS, and so are not available for UK managers managing non-UK funds or non-UK managers managing either UK or non-UK funds.

Managers that wish to use a label for their in-scope sustainability product will be already going through the general and specific criteria for each product to determine the best fit. Others have already applied for a label and are facing challenging questions from the FCA on whether the product meets the full required criteria for the applied label. Only a handful of these firms have been successful in applying a label to a product.

Overall, the FCA appears to be taking a rigorous approach towards label applications, which means getting the process right for reviewing a product against the criteria is crucial for a successful application.

Managers should consider having a sophisticated process in place when applying, ensuring that every part of the criteria is reviewed carefully in line with the investment profile of the product. Having a clear sustainability labelling framework in place will establish a good working foundation for managers to use the information and data gathered. This data can then be used to generate compliant disclosures under the SDR.

Understanding the temporary measures around naming and marketing requirements

In September, the FCA announced that its offering firms temporary flexibility to comply with the naming and marketing rules until 2 April 2025. The FCA has recognised that some managers are in the process of making important decisions regarding the name of funds in scope. These managers may need more time to make the necessary changes to the funds to ensure full implementation of the rules. Recent cases from AXA and Vanguard show that some managers are also dropping the word ‘sustainable’ from their funds’ names in response to the SDR.

How can Bovill Newgate help you implement the SDR requirements?

If you’re not quite there yet with applying the necessary elements to get your compliance processes in line with the AGWR, we can determine necessary tools you require. These can be tailored to your business and will help ensure your compliance with the rule now and prepare you for future changes.

If you’re beginning the process to label a product or haven’t started just yet, a will ensure a robust assessment is carried out for the product against the general and specific criteria. It’ll also create an efficient process for creating sustainability product disclosures, final reviews, and sign off from senior management.

We can help prepare a framework accurately fit to your business needs and provide an independent view on your workings for a label application.