SDR & Investment Labels – Are you ready?

Michael Sullivan, Senior Consutlant

Sustainable investing has been a growing area of the investment landscape for some time now, but with little to no guidance on what criteria actually makes funds sustainable. To tackle this, the FCA are introducing the Sustainability Disclosure Requirement (SDR) this year.

Designed for UK Asset Managers, it will introduce an anti-greenwashing rule, product labels and naming to increase the transparency on the sustainability profile of products and firms. As well as introducing rules and guidance on marketing funds based on their sustainability characteristics. The aim of SDR and the investment label regime is simple, financial products that are marketed as sustainable must walk the talk, backed by solid evidence.

It’s a positive step for investors (and the environment!), as it can help them identify sustainable investment products that meet the ESG criteria. It will require some work for asset managers to get their house in order. Commercially, early adopters can help avoid the accusation of greenwashing, the practice of making misleading claims about the benefits of an investment product. By providing clear and standardised information about the sustainability characteristics of their investment funds, asset managers can demonstrate their commitment to sustainability and build trust with investors.

Investment Labels – How do they work?

There are four labels under the SDR and Investment Labels publication. These are:

• Sustainability Impact – At least 70% of portfolio invested to achieve a pre-defined measurable positive impact
• Sustainability Focus – At least 70% of portfolio invested in assets that meet a standard of environmentally or social sustainability
• Sustainability Improvers – At least 70% of portfolio invested in assets that have the potential to become more environmentally or socially sustainable over time
• Sustainability Mixed Goals – At 70% invested across a combination of assets aligned with the above three categories.

The FCA have set a qualifying criterion that must be met for products to use an investment label. These 5 overarching principles/themes are:

• Sustainability objective – All products using a label must have a sustainability objective to improve or pursue positive environmental and/or social outcomes as part of their investment objectives
• Investment policy and strategy – Ordinarily, at least 70% of the product’s assets must be invested in accordance with its sustainability objective, with reference to a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability
• 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
• Stewardship – Firms must identify and disclose the stewardship strategy needed to support the delivery of the sustainability objective, including activities they expect to take and outcomes they expect to achieve.

So, if my fund wants to get an investment label, when does it have to be comply?

Below are key dates for compliance.

What do you need to do to ensure compliance?

Falling outside of BAU, there’s a lot that needs looking at now but you’re not alone. Our ESG expertise runs deep which means we can help across the full spectrum of the project including:

• Building out the business requirements
• Data and business analysis through to solution design
• Assist with the funds transitioning to an SDR Label
• Regulatory reporting
• Reporting and client queries – ensuring that the documentation meets the SDR criteria
• Engagement expertise across Front Office teams.
• A structured delivery schedule to meet the regulatory deadline.

Liqueo believe in working collaboratively and iteratively with you to deliver ESG solutions. These solutions are designed to be scalable and to add value, therefore laying the foundations to continue to enrich and build out functionality, incrementally as the scope develops over-time.

If you’re interest in learning more, please get in touch.