Getting prepared for UK SDR Fund Labels: A practical guide for asset managers

In summary: UK’s Sustainability Disclosure Requirements (SDR) regulation

Coming into force starting spring 2024, the UK Sustainability Disclosure Requirements (SDR) aims to bring a standardised approach to how UK asset managers label, market and report on their sustainable investment products. Published by the Financial Conduct Authority (FCA) in November 2023, the regulation includes a combination of new sustainable investment labels, corresponding disclosure obligations, as well as rules around greenwashing, naming, and marketing funds.

UK SDR timeline, scope and applicability

The SDR fund labels and disclosure obligations will come into force in a staggered manner over 2024-2026 for UK investment firms with £5bn+ in assets under management.

• May 31, 2024: The anti-greenwashing rule comes into force and applies to all (~45,000) FCA-authorised firms — irrespective of AUM. The rule simply restates earlier legislation that sustainability-related claims must be “clear, fair and not misleading”.
• Jul 31, 2024: Labels become available for use for all UK asset managers. Deadline for pre-contractual and consumer-facing disclosures is the first date of label use.
• Dec 2, 2024: Naming and marketing rules come into force for all UK asset managers that are UK-domiciled, use sustainability-related terms in their product marketing, and market products to retail investors in the UK — irrespective of AUM. This is also the deadline for pre-contractual and consumer-facing disclosures for asset managers falling in scope of these rules.
• Dec 2, 2025: Deadline for ongoing (annual) product- and entity-level disclosures for UK asset managers with £50bn+ in AUM. Note: Ongoing disclosures must be published 12 months after the label is first used and annually thereafter, so the veritable deadline would be earlier for an asset management company that begins using labels prior to Dec 2, 2024.
• Dec 2, 2026: First deadline for annual entity-level disclosures for UK asset managers with £5bn+ in AUM. Players of this size will need to publish ongoing (annual) entity-level disclosures — but not product-level disclosures.

UK SDR general requirements and disclosure obligations

Any fund that employs any of the four UK SDR investment labels or falls in scope of the naming and marketing rules must:

• Have an explicit sustainability objective as part of its investment objectives that (1) aligns with one of the specific labels; and (2) is “clear, specific, and measurable”
• Reference a “robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability” (‘the standard’)
• Obtain an independent assessment to confirm ‘the standard’ is fit for purpose
• Include measurable KPIs that demonstrate progress towards achieving the sustainability objective
• Have 70% of its assets invested in accordance with the sustainability objective and corresponding standard/KPIs

Applicable disclosures must also include an investment policy, investment strategy, escalation plan and stewardship strategy, as well as report any material negative environmental and/or social impacts that may arise (or have arisen) in pursuing the sustainability objective.

Following the initial pre-contractual and consumer-facing disclosures, asset managers must also carry out a review of the use of the label at least every 12 months, as well as take actions to ensure the criteria are met on an ongoing basis as part of the annual product-level disclosures.

UK SDR investment labels for sustainable funds

There are four investment labels developed by the FCA:

Sustainability Impact: Funds that have an ongoing, pre-defined, positive and measurable impact in relation to an environmental and/or social outcome.

• Focus: measurable direct impact; positive contribution
• Label-specific requirements: disclosing a ‘theory of change’

Sustainability Focus: Funds including assets that are environmentally and/or socially sustainable.

• Focus: investments defined as sustainably right now, as determined by a ‘robust, evidence-based standard’
• Label-specific requirements: none

Sustainability Improvers: Funds including assets that have the potential to become environmentally and/or socially sustainable over time.

• Focus: investments with the potential to become sustainable, i.e. those will be able to meet the ‘robust, evidence-based standard’ in the future
• Label-specific requirements: disclosing a timeline + short- and medium targets for improvement

Sustainability Mixed-goals: Funds that combine two or more of the above types of labels

• Focus: to invest in accordance with several sustainability objectives
• Label-specific requirements: identifying and disclosing the proportion of assets invested in accordance with each of the labels

What are the concrete main steps needed to build SDR-aligned funds?

The UK SDR provides clear guidelines for labelling and reporting while simultaneously allowing for considerable customization in developing products under the regime. In other words, while the disclosure obligations are clear, asset managers are given plenty of room for independent interpretation and decision-making when constructing funds under the labels. Most importantly, investors can and shall choose:

• What social and/or environmental objective to set for the fund
• What “robust, evidence-based standard” to adopt as a measure of that environmental and/or social sustainable objective (‘the standard’)
• Which specific KPIs to tie that environmental and/or social sustainable objective to, which will form the basis for the 70% sustainable investment threshold
• How and from whom to obtain the required independent assessment to confirm ‘the standard’ is fit for purpose. This may be obtained via a third or internal party, so long as the actor is independent to the investment function
• How to identify material negative environmental and/or social impacts that may arise (or have arisen) in pursuing the sustainability objective

How is Upright helping asset managers to prepare for SDR?

With nearly a decade of experience in quantifying the impacts of companies and funds and supporting a breadth of leading European asset managers in SFDR Article 8 & 9 classification, Upright has is equipping UK-based asset managers with a concrete set of tools for SDR fund labelling. With the SDR’s increased emphasis on actual holistic impact of companies, Upright’s science-based impact data is used by asset managers to help with the following topics in particular:

• Evaluating pre-existing funds’ alignment with all of the four SDR labels
• Constructing new funds in alignment with any of the four SDR labels
• Monitoring the 70% threshold for sustainable assets of a fund
• Identifying and disclosing the mandatory material negative environmental and/or social outcomes that may arise in pursuing the chosen sustainability objective
• Setting KPIs for pre-contractual and customer-facing disclosures, and reporting these on an annual basis for product-level and entity-level disclosures

What’s next?

Upright is supporting a number of UK asset managers in preparing for the July 2024 deadline. We’re happy to leverage our expertise to help both in terms of concrete data needs and navigating the regulatory requirements.

Read more about our data offering and who we work with:

• Asset managers
• Private equity