In the latest years, there has been increased interest on the social and environmental impact of products  and services. With this rise in public interest, governing bodies have begun unfolding regulation packages to fight greenwashing and ensure a transition towards a more sustainable economy.

Of course, financial products are not impervious to this dynamic shift, as they play a major role by allocating funds towards responsible actors.

The Greening Finance roadmap is the UK government plan to align the financial system with this new societal objective. The package is laid out in 3 phases:

• Informing
• Acting
• Shifting

The Sustainable Disclosure Requirements Regulation is the tip of the spear of said package, as it materializes the “Informing” phase. It aims at making available decision-useful information on the sustainability of financial products to consumers and other stakeholders.

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1. SDR in Short

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SDR Implementation timeline

The implementation of SDR is phased over the coming years, beginning with the anti-greenwashing rules in Q2 2024 and the labeling scheme in Q3 2024. The year will end with the enforcement of the naming and marketing rules with accompanying disclosures.

Further disclosure obligations will come into force in the course of 2025 and 2026. The integration of those outstanding product and entity-level disclosures are programmed for 2025 for firms with AuM > £50bn. The entity-level disclosures will then be extend to firms with AuM > £5bn.

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How SDR builds on existing requirements

While EU SFDR’s main objective is to foster transparency across financial products, it was rapidly adopted by the market as a de facto labeling scheme. However, there are persistent concerns that use of SFDR as such might lead to risks of greenwashing¹. Learning from market practices, the FCA launched its own regulation based on labels, each featuring its specific sustainability objective as part of its SDR package.

^{1. European Commission (2023), TARGETED CONSULTATION DOCUMENT IMPLEMENTATION OF THE SUSTAINABLE FINANCE DISCLOSURES REGULATION (SFDR), 4.1 POTENTIAL OPTIONS, (p.20)}

In its policy statement from November 2023, the FCA proposed the following comparison between SDR labels and potential SFDR product categorisation. However, while both systems are compatible it should be noted that there is not a perfect interoperability between the two frameworks, as requirements for products with sustainability characteristics are not fully aligned.

^{Financial Conduct Authority (2023), PS23/16: Sustainability Disclosure Requirements (SDR) and investment labels Policy Statement, Ongoing EU developments, (p.123)}

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Focus: How to comply with the labeling scheme

FCA-authorized firms that opt to label their products must select from four distinct labels, each defined by unique sustainability objectives. Compliance with the labeling scheme requires not only alignment with the chosen label's sustainability goals but also adherence to a set of overarching criteria applicable to any product that adopts a label.

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Overarching criteria

Products seeking to utilise a label must consistently adhere to both general and specific criteria associated with it. Additionally, firms must fulfill certain requirements and provide relevant disclosures. The general criteria encompass five core themes:

• Sustainability Objective: Products must integrate a sustainability objective aimed at enhancing environmental and/or social outcomes as part of their investment objectives. Firms must disclose any potential negative outcomes resulting from the pursuit of positive sustainability objectives.
• Investment Policy and Strategy: Typically, at least 70% of the product's assets should be invested in alignment with its sustainability objective, based on a robust, evidence-based standard. Firms must also disclose other assets held within the product and reasons for their inclusion.
• Key Performance Indicators (KPIs): Firms are obligated to identify KPIs to gauge progress toward the sustainability objective, applicable to the entire product or individual assets.
• Resources and Governance: Firms must ensure the presence of adequate resources, governance structures, and organizational arrangements to facilitate the achievement of the sustainability objective.
• Stewardship: Firms must outline a stewardship strategy to uphold the sustainability objective, including expected activities and outcomes. An escalation plan should be established to address instances where assets fail to demonstrate adequate progress toward sustainability goals and KPIs, while assets subject to such action should remain within the 70% threshold.

All labelled products will also require the firm to perform an independent assessment of the product’s practices alignment with its sustainability objectives, which can performed by independent functions within the firm or by an accredited third party validator.

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2. How does it impact you?

Client journey

The key challenge for Asset Managers is to mobilise all internal resources to handle request for information stemming from regulators and the market. This will impact all teams: as per the infographic below, many core functions are impacted by SDR.

Furthermore, current processes may be altered to include these new ESG considerations. Hence, data and technology will play a key role in implementing a state-of-the-art ESG strategy.

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Manaos tips

• Asset Managers are invited to consider alignment of SDR metrics with the framework they are already using at the earliest to minimize the costs of reconciling multiple frameworks.
• Early feedback suggests that the FCA has no plan to specify which metrics should be used. Therefore, keeping a flexible setup in terms of providers and indicators is strongly recommended.
• Data-driven communication and powerful IT tools are essential to effectively convey information between stakeholders. By leveraging data analytics and visualisation tools, asset managers can present complex ESG data in a clear and concise manner, making it easier for investors and other stakeholders to understand the sustainability risks and impacts of their funds.

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3. Discover our SDR Solutions

Our ambition is to “manage complexity simply”. Our SaaS-based platform helps Asset Managers and Investors aggregate investment and extra-financial data, enabling them to produce and share, internally or externally, product or entity level ESG metrics in a visually intuitive way.

We have built specific SDR products to cover UK specificities and we leverage the expertise acquired with SFDR to provide actionable insights on how integrate technology, data and ESG to meet your regulatory obligations.

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Manaos tips

• Leverage our portfolio coverage app to find the best ESG data providers for your chosen SDR metrics and relevant portfolios.
• Utilise our platform's robust analytics and dashboard features to facilitate the creation of SDR-compliant disclosures, as well as custom reports tailored to your specific needs.

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Come speak with our experts to help you navigate between SDR uncertainties and leverage our expertise acquired with SFDR. We will help navigate potential between ESG data points and required metrics and think about how to integrate manaos in you overall operating model.

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Use cases demonstrating our expertise

• Successfully built a fund referencial of 8500+ inventories disseminated through 140+ Asset Managers and counting. Equipped one of Europe's Top 5 Asset Managers with a seamless look-through solution for enhanced financial risk tracking across the whole of its fund range.
• Provided end-to-end SFDR solution to one of Ireland's largest Asset Managers, from portfolio look-through, to integrated ESG data connections with Sustainalytics and ISS ESG, and to custom reporting solutions, under tight deadlines.
• Integrated over 260 datasets from 20 data providers, from small finTechs, to large ESG rating agencies as well as proprietary datasets from clients like LBP AM via their app « Great », available on-demand through our ESG marketplace.

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Useful links:

Sustainability disclosure and labelling regime

https://www.fca.org.uk/publication/guidance-consultation/gc23-3.pdf

https://finance.ec.europa.eu/system/files/2023-09/2023-sfdr-implementation-targeted-consultation-document_en.pdf

https://www.fca.org.uk/publication/policy/ps23-16.pdf

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