The Big Exchange explores the Sustainability Disclosure Requirements (SDR) Policy from the UK’s regulator, the Financial Conduct Authority (FCA), and goes through the introduction of SDR’s labelling regime for sustainable funds for the first time.
The SDR (Sustainability Disclosure Requirements) Policy from the UK’s regulator, the Financial Conduct Authority (FCA), introduces a labelling regime for sustainable funds for the first time. In a nutshell, it's a bit like food labelling. The aim of the labels is to help individuals navigate the sustainable investment market and identify which funds are best aligned to their preferences.
In addition, anti-greenwashing rules (to ensure sustainability-related claims must be fair, clear and not misleading) reinforce the FCA’s clear intention that financial products marketed as sustainable should do as they claim and have the evidence to back it up.
Four distinct labels have been developed for use by UK domiciled funds from 31st July 2024, covering a variety of sustainability objectives and investment approaches to achieve those objectives that may be employed.
Firms may choose to use the labels for products seeking to achieve positive sustainability outcomes if they meet the qualifying criteria on an ongoing basis. For a label to be approved, they must set out the sustainability objectives of a fund i.e. what it is trying to achieve and how it intends to meet these objectives.
We expect the roll-out of the labels to be gradual as asset managers will have to do a lot of preparatory work, such as adjusting their prospectus and potentially their portfolio holdings to meet the criteria, and then compile the necessary evidence and additional documentation.
There is no obligation to adopt a label, and some of the funds we offer, notably those domiciled elsewhere in Europe, and Ethical and Responsible strategies, are not eligible under the current regime.
We will display any SDR labels adopted in a prominent place as soon as they are made available to us. This will be displayed in the list of funds offered on our home page. Labelled funds will be accompanied by a Consumer Facing Disclosure (CFD) document, which is a concise and comprehensive explanation of a fund’s sustainability credentials. You will find this alongside the factsheet and KIID.
Whilst funds with an overseas domicile (typically Luxembourg or Ireland) will not be in scope of SDR at the outset, a consultation is underway which should allow them to be included in the future. In the interim, these funds must carry a notice (by 2 Dec 2024 at the latest) indicating they are not subject to the UK labelling and disclosure requirements.
The 4 labels are: "Sustainability Focus", "Sustainability Impact", "Sustainability Improvers" and "Sustainability Mixed Goals". Each has defined sustainability objectives and different investment approaches to achieve those objectives as set out below.
‘Invests mainly in assets that focus on sustainability for people or the planet’
The sustainability objective must be consistent with an aim to invest in assets that are environmentally and/or socially sustainable, determined using a robust, evidence-based standard that is an absolute measure of sustainability.
A minimum of 70% of assets must meet that standard, and other assets held must not conflict with the sustainability objective. The fund may be aligned to themes, provided these requirements are met.
‘Invests mainly in assets that may not be sustainable now, with an aim to improve their sustainability for people or the planet over time’
The sustainability objective must be consistent with an aim to invest in assets that have the potential to improve environmental and/or social sustainability, over a defined period, as determined by their potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability. A minimum of 70% of assets must meet that standard.
Stewardship should help to accelerate improvements in sustainability over time. The approach acknowledges that not everything can be green today but aims to be in the future.
‘Invests mainly in solutions to sustainability problems, with an aim to achieve a positive impact for people or the planet’
The sustainability objective must be explicit and consistent with an aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome. A minimum of 70% of assets must meet that standard.
Firms must provide a ‘theory of change’ setting out how they expect their activities and the fund's holdings to achieve a positive impact.
Firms must specify a robust method for measuring and demonstrating this positive impact. As with all labels, firms must have an escalation plan for situations where assets are not demonstrating sufficient progress towards the sustainability objective over time.
‘Invests mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet’
This is for products with a sustainability objective to invest at least 70% in accordance with a combination of the sustainability objectives for the other labels. Firms must identify (and disclose) the proportion of assets invested in accordance with any combination of the other labels.
We have outlined below some of the key terminology you may come across when looking at the criteria for fund labels:
To qualify for a label, a product must have a ‘sustainability objective’ that is clear, specific, and measurable. This is an explicit statement of intention to invest ‘with the aim of directly or indirectly improving or pursuing positive environmental and/or social outcomes’.
Positive environmental and/or social outcomes may be improved or pursued via a combination of:
1. contributions made by the assets in which the product invests (known as the ‘enterprise contribution’)
2. contributions made by the asset manager’s activities, for instance through investor stewardship (known as the ‘investor contribution’).
The qualifying criteria require that the fund’s assets be selected with reference to a robust, evidence-based standard that is an absolute measure (not relative to a benchmark) of environmental and/or social sustainability.
The methodology or approach may be based on, or determined by, an authoritative body (e.g., a government or regulator), industry practice (e.g., a third-party data) or a proprietary methodology (developed in-house by the firm).
The standard must be:
• robust, meaning that it will stand up to scrutiny
• evidence-based, meaning that it is derived from or informed by an objective and relevant body of data or other evidence.
This information aims to provide consumers with better, more accessible information to help them understand the key sustainability features of a product. Firms must produce a clear CFD for both products with a label and products using sustainability-related terms without a label.
The CFD summarises the sustainability characteristics of products and is specifically designed for retail investors. It contains details about the label (or explains why the product doesn't have a label), the investment policy (including what it will and will not invest in), and relevant metrics with signposting to more detailed information.
While the labels are only for products seeking positive sustainability outcomes, there are additional rules are to help consumers differentiate between products that have sustainability objectives and use a label, and those that have sustainability characteristics but do not use or qualify for a label.
Sustainability-related terms can only be used in product names and marketing materials if:
1. they use a label – provided that, where the ‘sustainability focus’, ‘sustainability improvers’ or ‘sustainability mixed goals’ labels are used, the word ‘impact’ is not used in the product’s name, or
2. they do not use a label but comply with the ‘Product name’ and ‘Marketing’ rules. The product must have sustainability characteristics and the product’s name must accurately reflect those characteristics, but the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms must not be used.
In these cases, firms must produce the same types of disclosures as required for a labelled product. They must also produce and publish a statement to clarify that the product does not have a label and the reasons why.
The FCA has published anti-greenwashing rules to ensure that any sustainability related claims which FCA-authorised firms make about their products and services must be fair, clear and not misleading.
Firms must not state or imply features of a product that are not true, nor should they overstate or exaggerate its sustainability or positive environmental and/or social impact. For example, a firm must not claim a fund is ‘fossil fuel free’ if it includes investments in companies involved in the production, selling, and distribution of fossil fuels, even where revenue from those activities is below a stated threshold.
All firms must comply with the anti-greenwashing rule, which came into effect from the end of May 2024. However, it is permitted to use sustainability terms in factual, non-promotional statements about a product, such as in a macroeconomic commentary.
As with all the rules in the SDR policy statement, these rules apply only to UK authorised firms and funds, and the FCA is working with HM Treasury on how to treat overseas funds sold in the UK.
As a fund distributor, we will request evidence and monitor information we receive to ensure all sustainability-related references comply with the rules. A sustainability-related claim might be that an investment aims to deliver positive outcomes for people or the planet. It could also include, but is not limited to, specific claims relating to the environment, climate or climate change, biodiversity and nature, social issues, or corporate social responsibility. We will also ensure that our platform reflects any SDR labels and corresponding CFD’s, and provides clarity where labels are not present.
The Big Exchange is supportive of the UK SDR Policy and fund labels. We offer funds which invest in companies that address societal challenges, and avoid or mitigate doing harm, through their products, services, and business practices.
We created a methodology to help investors understand how funds are contributing to a more sustainable future and make choices that align with their personal values. Our investment ethos is to measure company revenues alignment with the Sustainable Development Goals (SDGs). The SDGs are a call to action to end poverty and inequality, protect the planet, and ensure that all people enjoy health, justice and prosperity.
We believe the labels complement this approach, by setting out guidelines that funds must meet to demonstrate they are delivering what they promise. However, we try to go a step further by having our own impact analysts review all funds before listing them on the platform. To be considered, managers must disclose their entire holdings (not just the top 10) so our impact analysts can review exactly what each fund invests in.
Further, funds are independently assessed on their sustainability credentials, following completion of our in-depth questionnaire, and then a subjective overlay is applied. This involves checking every stock in the portfolio against specific social and environmental impact themes which are in turn aligned with the relevant SDGs.
Asset managers approach the challenges in different ways, so we rate funds as Bronze, Silver, or Gold, to allow comparisons to be made. Funds must meet at least the bronze criteria for inclusion on The Big Exchange. We give credit for positive influence through engagement, the quality and transparency of reporting, and we highlight any exposure to controversial activities. We believe this helps us to identify those funds that are truly going the extra mile.
Read more about our methodology & process here.
Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
This article does not constitute investment advice. If you are unsure whether an investment is suitable for your circumstances, you should contact an independent financial advisor.
The Big Exchange (TBF) Limited is a wholly owned subsidiary of The Big Exchange Limited. The Big Exchange (TBF) Limited is an Appointed Representative of Resolution Compliance Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 574048). (CaRA: 8665)
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