SDR is the legislation which ensures that if an asset manager wants to market an ESG or Sustainable fund in the UK, it has to be granted a label by the FCA (UK financial regulator).
It was designed to be retail friendly, with just 4 simple labels:
Sustainability Focus 🌷
Sustainability Improvers 🌼
Sustainability Impact 🌻
Sustainability Mixed Goals 💐
But we are not sure it is working as intended.
Only 80 funds have a label, and the deadline to meet the naming-and-marketing rules passed last week.
Many asset managers have told us that the application process is very difficult, as the FCA needs to be convinced of what "robust, evidence-based criteria" will evidence progress towards the fund's precise "sustainability objective". This is no bad thing; the FCA is determined to clamp down on greenwashing and not allow funds to label themselves as sustainable on the back of some basic ESG integration - as is often alleged in the EU with "SFDR Article 8".
The problem now is that even though a fund can't use words like "Sustainable," "Sustainability," or "Impact" in its name without an SDR label, it can still use those terms in its marketing. It can also use phrases like "ESG" and "Climate Friendly" in its name, as long as it follows the SDR's naming-and-marketing rules.
These rules do not represent a high hurdle in our view:
1️⃣ All claims must be 'clear, fair and not misleading'
2️⃣ ESG data must be integrated into 'the investment process', used to monitor the fund holdings regularly and to inform consumer-facing disclosures
3️⃣ 70% of the fund's assets must meet the sustainability criteria outlined in the marketing materials.
Morningstar data supports our view - whereas there are 80 funds with Sustainability labels, there are now 325 funds that do not have labels, but are being marketed as having 'sustainability characteristics'.
These 325 funds have 8 times the total AUM of the 80 labelled funds. Of these 325 non-labelled funds, 101 use one of the terms "ESG", "Responsible" or "Ethical" in their actual names.
You would think that the "BlackRock ESG Insights Equity Fund", the "Baillie Gifford Global Alpha Paris-Aligned Fund" and the "UBS Global Equity Climate Transition Fund" would need an SDR label, wouldn't you?
Well they don't.
We are heading for a market where individual investors start to think "there are way more ESG funds who do not have SDR labels... so even though I want a wholly sustainable portfolio, I shouldn't restrict myself by insisting on funds with SDR labels."
Was this the FCA's desired outcome when it drafted the SDR? I doubt it.
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