Pension schemes have given a cautious welcome to changes made by the Financial Conduct Authority to its final rules on the new sustainability disclosure requirement (SDR).
These new SDR rules will come into force next year and are designed to provide a transparent and clear labelling regime for investment funds, to address concerns about greenwashing.
The final rules will introduce a new fourth category: Sustainability Mixed Goals, alongside the three previously proposed labels: Sustainability Impact; Sustainability Focus and Sustainability Improvers.
The final rules also change the earlier title ‘sustainable’ to ‘sustainability’ as the regulators said this reflected the fact some assets are “on a journey to becoming sustainable”.
This new regime is designed to be similar to the EU’s SFDR regulations, where investments fund have an Article, 6, 8 or 9 designation — with article 8 funds promoting sustainable characteristics and article 9 funds being closer to impact funds.
Under the UK’s SDR rules there will be four fund labels, defined as follows:
- Sustainability Impact – at least 70 per cent of portfolio invested to achieve a pre-defined measurable positive impact.
- Sustainability Focus – at least 70 per cent of portfolio invested in assets that meet a standard of environmentally or social sustainability.
- Sustainability Improvers – at least 70 per cent of portfolio invested in assets that have the potential to become more environmentally or socially sustainable over time.
- Sustainability Mixed Goals – at 70 per cent invested across a combination of assets aligned with the above three categories.
XPS Investment head of ESG research Alex Quant welcomed the fact that the FCA had finalised their policy statement on this issue. He said the new fourth category would add flexibility but had the potential to add ambiguity too.
“The final policy provides welcome confirmation of the labels which UK asset managers will need to use to define the approach taken towards sustainability within their funds.
“The new fourth label is useful in that it allows for funds to incorporate a mix of assets at different stages of their sustainability journey, and therefore cater for different investors’ preferences – particularly useful for multi-asset funds.
“However, it does introduce more scope for confusion and ambiguity. Investment managers will still have discretion around how they define a sustainable activity or how they achieve impact, and therefore thorough due diligence is still required to really understand what’s going on under the bonnet for a given fund.”
The labelling regime will come into force on 31 July 2024. This will follow anti-greenwashing rules coming in May 2024, and before naming and marketing rules which will apply from 2 December 2024.
The anit-greenwashing rules will require firms to make fair, clear and non-misleading claims on the sustainability profile of their products and services. There will be consultation on this proposals early in 2024.
The naming and marketing rules specifies that any product with sustainability-related terms in their names must be reflected in their sustainability characteristics, which should also be marketed accordingly and in line with the anti-greenwashing rule.
