The implementation of the Sustainability Disclosure Requirements (“SDR”) and investment labels marks a significant step towards enhancing transparency and accountability in sustainable finance. The SDR and investment labels framework has come into effect on 2nd December, 2024, with firms already permitted to utilise investment labels since 31st July 2024, and applies primarily to UK asset managers, who must ensure their investment products meet specific sustainability criteria and are accurately disclosed (see more in our previous article).
In line with Consumer Duty, FCA regulation on SDR and investment labels is aimed at protecting consumers by helping them understand if a fund has a stated sustainability focus. A key feature of the regime is that to qualify for an investment label specific criteria must be met and confirmed through comprehensive disclosures. This article sets out some examples of both good and poor practices related to various investment labels identified by the FCA, demonstrating how firms can comply with the disclosure requirements. Firms are advised to refer to this publication to see the full extent of the good and poor practices identified by the FCA.
| Good Practice | Poor practice | |
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Sustainability Objective: To meet the FCA’s expectations in promoting consumer confidence, investments are expected to have a specific goal, such as focusing on businesses that reduce carbon emissions, and implement sustainable practices. Firms must show how the product’s sustainability objectives directly contribute to environmental or social benefits. |
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| Sustainability Focus Label |
Investing in companies that create positive impacts on their workers, communities and the environment through: ◉ Providing transparency and accountability to stakeholders; and ◉ Minimising their environmental footprint and adopting sustainable practices. |
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| Sustainability Improver Label |
Investing in assets that support climate change mitigation through: ◉ Reducing carbon emissions caused by human activities and improving air quality, which reduces respiratory illnesses and healthcare costs; and ◉ Reducing GHG emissions and, through this, the physical risks of climate change, such as extreme weather events. |
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Asset Selection Criteria: Firms should define specific, evidence-based standards for selecting assets that align with the sustainability objectives of the product. |
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| Sustainability Focus Label |
Using the following frameworks: ◉ UN Sustainable Development Goals (SDGs) focussing on investee companies generating a specific percentage of revenue from activities supporting specific SDGs, such as Zero Hunger, Good Health and conservation and sustainable use of marine resources; and ◉ B-Corp Certification –investing in companies that meet B-Corp Certification standards, either through certification or internal assessment, ensuring alignment with the product’s sustainability objectives. |
◉ Failure to connect the asset selection process with the product’s sustainability objective and goal; ◉ Not disclosing any firm override in the asset selection process. |
| Sustainability Improver Label |
Investing in assets that align with a Net Zero by 2050 trajectory such as: ◉ Assets with a validated Science-Based Targets initiative (SBTi) net-zero target or ◉ Those committed to adopting an SBTi target within 24 months. |
◉ Not providing details on the evidence the firm uses to confirm that assets meet the required sustainability standards. |
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Monitoring and Reporting of Sustainability Performance and KPIs: Firms must, subject to certain exceptions, ensure that at least 70% of their assets are aligned with sustainability objectives, implement effective monitoring policies, and establish KPIs to measure progress toward achieving these goals. |
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| Sustainability Focus Label |
◉ Energy consumption – Tracking total energy usage, distinguishing between renewable and non-renewable sources, and monitor efficiency improvements; and ◉ Water usage – Recording total water consumption, including recycling and conservation efforts. ◉ Reviewing post-issuance reports to confirm that the funds have been allocated and used as intended. KPIs may include the utilisation of funds as specified, greenhouse gas emissions avoided and energy savings. |
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Evidence of Asset Alignment: Firms must outline the evidence used to verify that the assets within the product align with the evidence-based standards. This includes demonstrating how the assets meet both short- and medium-term sustainability targets and confirming their potential to contribute to the product’s sustainability objectives. |
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| Sustainability Focus Label | ◉ Use of scoring-based model descriptors to Invest in assets based on in-depth internal research, which has included establishing the relevance of various factors to specific sustainability outcomes. | ◉ Lack of explanation and evidence justifying the chosen scoring or threshold for defining sustainability. |
| Sustainability Improver Label | ◉ Short-term target: achieve a 7% annual reduction in Scope 1 and 2 emissions;
◉ Medium-term target: reduce Scope 1 and 2 emissions by 50% by 2030; and ◉ Long-term target: achieve a 100% reduction in Scope 1 and 2 emissions by 2050. |
◉ Inconsistencies or missing short-term and medium-term targets, which should align with the long-term sustainability goals for the assets. |
How Complyport Can Help
At Complyport, we recognize the growing importance of SDR and ESG (Environmental, Social and Governance) factors. Our services help firms adopt sustainable practices, create positive social impact and maintain responsible governance, in line with current and upcoming regulations. We can support your firm by providing:
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- SDR/ESG Readiness Assessments
- SDR/ESG Review against categories
- Policy and procedure updates
- Ongoing support for any questions regarding the new regulations
- SDR/ESG Training
