11 Dec 2024
The FCA recently implemented the Sustainability Disclosure Requirements (SDR) – a package of measures designed to improve transparency in sustainable investing and crack down on greenwashing within the industry. What are the new rules and what does this mean for investors and advisers?
The new measures apply to UK funds such as unit trusts, investment trusts, OEICs etc that make sustainability claims in either their fund name, or in how they are marketed. The rules do not apply to offshore funds or pension funds. The measures are firmly focused on the end investor’s perception of a particular fund or product that describes itself as ‘sustainable’. The issue of ‘greenwashing’ has been tackled head-on, with naming and marketing rules now in force, together with earlier anti-greenwashing rules to make sure that any claims of sustainability are accurate, not misleading and can be substantiated.
For a fund to be able to make sustainability claims, there are overarching criteria that must be met in terms of a fund’s sustainability objectives, investment policy, KPIs, resource and governance and stewardship. The fund must have an explicit sustainability objective as part of its investment objectives, at least 70% of its assets must be invested in accordance with the sustainability objective and companies must identify KPIs to measure progress against the sustainability objective. Many responsible or ethical funds won’t make any sustainability claims and so will be outside the scope of the new rules.
In the ESG landscape, the ‘S’ is now shaped by the FCA’s four sustainability labels which aim to help investors understand where their money is going – these labels are: Sustainability Impact; Sustainability Focus; Sustainability Improvers and Sustainability Mixed Goals. Let’s take a deeper dive into what they mean. Sustainability Focus are funds looking to invest in companies that are already aligned with a green focus. Sustainability Impact involves companies that invest in solutions to conquer a particular problem or to achieve a positive impact for people or the planet. Sustainability Improvers involves investment in assets that have the potential to become more sustainable over time and Sustainability Focus relates to investment in assets that are environmentally or socially sustainable. Sustainability Mixed Goals refers to investment in assets that meet or have the potential to meet a robust, evidence-based standard for sustainability, and/or invest with an aim to achieve positive impact.
Why has this framework been brought in? Until now, funds could have been marketed as sustainable without having to meet any requirements in this area or provide information as to their sustainability credentials. This made it difficult for an investor to understand and compare different funds. Clients who are keen to contribute to a greener and more socially responsible planet will now have greater visibility on where their money is going, and they’ll be able use their investment to balance sustainable objectives alongside financial gains. The top two priorities in the adviser world are widely known to be performance and cost but with the new SDR framework and the visibility provided, conscientious investing may take one of the top spots.
Are these changes advantageous for the adviser? Advisers will need to fully understand the new rules and how they affect the funds they use, so they are properly equipped to discuss with clients and support them in meeting their investment goals. Clients that are keen to contribute to a better world will expect complete disclosure on what they are investing in. Although more work will be involved, increased awareness and knowledge of the world of investments can only be a positive step and there is also the option of lightening the load by outsourcing this research to a fund rating specialist, minimising the workload of the adviser and ensuring that clients are effectively achieving their goals. At RSMR, our approach to ESG aligns with the regulator’s view that ESG integration forms part of investment risk management, with sustainability and impact subsets of the wider market seeking positive sustainability outcomes. It’s worth noting that how these rules may be applied to MPS and DFM solutions is still at consultation stage.
It’s important to remember that SDR is aimed firmly at funds that claim to operate to a sustainable mandate, it doesn’t apply to funds that take a broader values based/ethical approach, although some do seek positive outcomes as well. As most advisers know, ethical investing is very much a personal matter that is carefully discussed on a client-by-client basis – the overlap between ‘ethical’ and ‘sustainable’ is significant, but there are some high quality ‘ethical’ funds that won’t apply for one of the four sustainable labels, simply because that isn’t what they’re aiming to do. SDR is a giant step in the right direction, but the type of qualitative fund research that underpins existing ratings such as RSMR Responsible remains of utmost importance – because this will continue to help advisers match clients’ ethics and beliefs to an appropriate solution. Values based (i.e. ethical) funds that do not apply a sustainability screen are unlikely to have a label and this is important because there is a risk that intermediaries will use the SDR labels to filter the universe which would sift out these equally important funds. This is where the RSMR qualitative research can assist in raising awareness of the investment process of these types of funds as they still meet client needs.
Does SDR reinvigorate a level of interest in responsible investment? There is an opportunity for advisers to revamp their business and get ahead, to be fully clued up on sustainable investing for their clients. The next generation of investors is likely to be more demanding and have greater awareness and concern for where their money is going and we may even see a transformation in client requirements, meaning that performance and cost are knocked off the top spots. Returns will clearly always be at the forefront of the investor’s mind but making a difference could become a vital factor in the decision-making process. If you can have performance and achieve these goals, it’s a no brainer, and the more clued-up advisers are in being able to talk to their clients about this type of investment, the greater the opportunity to develop their own business.
Scott McNiven, Business Development Manager
Katie Sykes, Client Engagement & Marketing Manager
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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