21st March 2024

Understanding SDR - A Primer

In the ever-evolving landscape of financial regulations, the term "SDR" has been making its rounds. But what exactly does it mean, and why should advisers and clients pay attention? 

SDR, or the Sustainability Disclosure Requirements, is a new policy statement (PS23/16) issued by the Financial Conduct Authority (FCA) aiming to bring clarity and transparency to sustainable investments.

Published on November 28, the SDR policy statement marks a significant step towards addressing the growing demand for sustainable investment options. But what do these changes entail, and how will they impact advisers and their clients?

At its core, the SDR focuses on improving communication and ensuring that claims about sustainability are clear, fair, and not misleading. One of the key objectives is to bridge the gap between client expectations and the actual practices of investment funds regarding environmental, social, and sustainability (ESG) factors. The policy statement introduces differentiated rules for funds based on their emphasis on sustainability issues and their integration into investment processes.

The rules under SDR are largely principles-based, allowing for diverse strategies to coexist within the framework. However, funds seeking to adopt sustainability labels must meet specific requirements, including outlining their sustainability aims and demonstrating positive sustainability outcomes. 

The scope of SDR is extensive, requiring funds to explain any references to ESG characteristics thoroughly. Additionally, the policy statement introduces new fund labels for sustainable funds, which will come into effect at different times, starting from July 2024.

One of the pivotal aspects of SDR is the introduction of an 'anti-greenwash' rule, aimed at preventing the overstatement of sustainability characteristics for financial gain. This rule, which will come into effect in May, reinforces existing requirements for clear and fair communication in sustainability-related marketing.

As the SDR policy unfolds, it will bring about changes in naming and marketing rules (from December), consumer-facing information, and detailed disclosure requirements for funds and fund managers. These changes will not only enhance transparency but also empower investors to make informed decisions aligned with their sustainability preferences.

In the subsequent articles of this series, we will delve deeper into the specific components of the SDR policy and explore its implications for advisers, clients, and the broader financial ecosystem.

This article is adapted from a longer article.

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Julia Dreblow is a founder of SRI Services and Fund EcoMarket, FCA DLAG member, BSI fund standard lead author and Vice Chair of the new industry-led ‘Adviser Sustainability Group’

Investments, Ethical/ESG