SDR fund labels – update:

The adoption of sustainable fund labels is big news at the moment, particularly as we approach the 2 December ‘Naming and Marketing’ deadline, which require additional caution when fund managers make sustainability related comments and claims. (See full SDR rules)

• Much is changing, but a key driver of current activity is that unlabelled funds will no longer be able to use the words ‘sustainable, sustainability or impact’ (or similar)  in their names – although the FCA announced temporary ‘flexibility‘ in September (essentially a four month extension) for relevant funds that had submitted an application  to them amending disclosures in line with ESG 5.3.2R by 1 October 2024.

Evidence that we have gathered from fund mangers suggests however that we are now in a period of immense activity and change.

We have sought to capture this via a range of ‘SDR labelling’ filter options on our (open and free to access) Fund EcoMarket database.  Some of the current key numbers (to date) are as follows:

• 103 fund managers have told us they are working towards adopting labels for named funds (we view this as a likely underestimate).
• 176 funds have told us they are ‘not eligible’. (It is important for financial advisers and others to understand that many funds are not yet able to use the new labels, for example because they are offshore).
• The managers of 13 funds have told us they are  ‘intentionally unlabelled’  – in other words, their funds are probably ‘in scope’ – and may well be appropriate for those seeking funds that take sustainability seriously – but the manager has decided not to pursuing a label at present. (This may relate to approval process concerns.)
• Fund EcoMarket shows 2 labelled funds (we expect this to increase soon).

What else are we hearing?

• We understand that around 11 funds have achieved labels.  2 of these are labelled as such on our database.  Some funds have asked us to hold back their labelling status until they ‘go live’ (eg aligned literature / ready to press ‘go’.)
• Many strong funds are in the labelling process (which starts, in many cases, with the need to amend the fund prospectus) but are struggling to gain labels because of what we view as (sometimes rather extreme) teething issues.  ‘Broad based’ (comprehensive, complex) sustainable funds appear to be the most affected. The FCA has listened to feedback and sought to ease these with a recent notice giving disclosure examples, however we believe there is more to be done in this regard if we are to maximize the potential benefits of SDR.
• Many fund managers are approaching this area with caution.  Some managers, who we also regard as  competent, are, for example, applying for a label for a single fund in order to better understand the process, with a view to putting other funds through the process in due course.
• Some fund managers, who we also view as solid, are watching the process with a view to starting the labelling process once things settle down and are clearer.
• Many managers are working with their peers via groups such as the IA to improve their understanding of FCA requirements and feeding back concerns to the FCA in concert. (SRI Services has been doing likewise.)
• There are real concerns about the cost of the process, particularly relating to legal fees. This is holding the adoption of labels back as ‘commercial’ can not be ignored – and the benefits of adopting a label remain unproven…  and the process may yet evolve.
• There remain areas of uncertainty, such as ethical funds (provided they have SDR friendly  policies).  There are, in our view, clear arguments to be made in favour of encouraging such funds to adopt labels. They support the reallocation of capital to companies with higher sustainability standards – and negative screening is client friendly because it is easy to understand (and prove).
• Many funds are changing names because they are clearly not aligned to SDR’s aims.   These are typically funds with an ESG (risk) focus which lack the necessary (for SDR) focus on ‘intentionality’  – deliberately focusing on and supporting the shift to higher environmental or social sustainability standards.  This is an important and welcome development as it will help reduce greenwash risk.

What does this mean for financial advisers, wealth managers and other intermediaries?

We recognise that this is a real headache for many fund managers at the moment, and as it is progressing more slowly than we had hoped –  this has implications for portfolio managers and those presenting and explaining funds to clients.

However it is still early days.

Our suggestion for intermediaries and portfolio managers is to keep a close eye on this area as at some point it will become ‘business as usual’ to look at SDR labels when selecting funds and portfolios, and greenwash will become rare (and therefore an even greater risk if breached).

We remain supportive of SDR, and in line with research carried out by the FCA and others, believe client interest in sustainability is far higher than current market activity indicates – although we know views vary and are often nuanced – hence the 250 filter on Fund EcoMarket.

We also remain of the view that extending SDR should not be rushed.

To learn more about this area we suggest viewing the videos from our event, including the key note speech by the FCA’s Sacha Sadan – and funds managers who were discussing the labels (and their journey), and managers who’s funds sit ‘beyond the labels‘.