After
years
of
guidance
and
extensive
consultations,
the
long-awaited
UK
Sustainability
Disclosure
Requirements
(UK
SDR)
–
a
country-specific
regulation
largely
influenced
by
the European
Union’s
SFDR –
has
come
into
force.
Well,
partially
at least.
Understandably,
financial
market
participants
have
many
questions
surrounding
the
new
rules;
from
the
impact
it
will
have
on
industry
attitudes
to
ESG,
how
capital
is
allocated,
the
practicalities
of
the
classification
system,
and
ultimately,
what
this
means
for
end
investors.
But
before
we
interrogate
the
UK
SDR’s
intentions,
let’s
unpack
the
essentials.
What
is
the
UK
SDR?
Born
from
the
Financial
Conduct
Authority’s
(FCA)
Sustainability
Disclosure
Requirements
and
Investment
Labels
Policy
Statement,
the
framework
outlines
four
product
labels
that
can
be
applied
to
investment
vehicles,
along
with
and
product-
and
entity-level
disclosures.
An
additional
key
objective
of
the
SDR
regulation
is
to
minimise
greenwashing
through
its
anti-greenwashing
rule.
Why
is
the
UK
SDR
Important?
On
a
practical
level,
the
regulations
and
disclosures
outlined
by
SDR
are
mandatory,
so
financial
market
participants
subject
to
these
rules
must
be
compliant.
On
a
deeper
level,
the
FCA’s
decision
to
introduce
these
rules
reflects
a
growing
demand
for
ESG-focused
funds.
Increasingly,
people
want
two
things:
positive
returns
and
a
positive
impact.
The
rules
and
disclosures
are
intended
to
increase
transparency
around
investment
products
–
a
benefit
to
end
investors.
Where
Does
the
UK
SDR
Cover?
Unsurprisingly,
these
rules
span
the
United
Kingdom,
but
the
implications
will
travel
much
further,
with
guidance
on
overseas
funds
expected
later
in
2024.
Interestingly,
we’re
already
seeing
an
impact,
with
the
most
recent
SFDR
consultation
re-evaluating
whether
Article
8
&
9
funds
should
have
clearer
and
stricter
labels,
in
line
with
the
UK
SDR.
Who
Does
the
UK
SDR
Apply
to?
Quite
a
few
people,
according
to
the
FCA’s
policy
statement:
1.
UK
firms
that
manage
investment
funds.
2.
UK
firms
that
distribute
investment
products
to
UK-domiciled
retail
investors.
3.
FCA-authorised
firms
(domiciled
in
the
UK)
that
make
sustainability
claims
in
their
marketing
about
their
products
and
services
(anti-greenwashing
rule).
When
does
SDR
Come
into
Force?
There
are
three
key
dates
for
2024,
so
mark
your
calendars.
• May
31
2024:
Anti-greenwashing
rules
and
guidance
take
effect;
•
July
31
2024:
Firms
can
start
to
apply
the
labels
alongside
disclosures;
•
December
2
2024:
Naming
and
marketing
rules
take
effect.
How
Will
the
UK
SDR
Work?
Here’s
where
the
questions
crop
up.
Operationally,
SDR
will
function
via
four
voluntary
labels
that
asset
managers
can
apply
to
their
investment
products
(from
July
31
onwards),
so
consumers
have
greater
transparency
about
different
investment
products.
But
long-term,
the
future
is
less
clear
if
we
think
about
“work”
in
the
context
of
impact
–
what
the
UK
SDR
intends
to
achieve.
Some
financial
market
participants
are
sceptical
this
new
regime
will
drive
more
capital
into
sustainable
investments.
There
is
a
general
sentiment
that
the
four
labels
are
too
narrow
in
scope,
which
will
suppress
asset
managers
from
adopting
them
for
their
products,
at
least
in
the
short
term.
According
to research
by
Morningstar,
an
optimistic
scenario
would
see
about
300
UK
open-
and
closed-end
funds
opting
for
a
label
by
year-end.
These
labelled
funds
would
represent
8%
of
funds
domiciled
in
the
UK,
and
less
than
3%
of
all
funds
available
for
sale
in
the
UK.
For
asset
managers,
the
criteria
outlined
by
these
labels
will
likely
mean
funds
opt
for
the
“Sustainability
Focus”
or
“Sustainability
Mixed
Goals”
labels,
as
opposed
to
the
“Sustainability
Impact”
label,
which
would
be
the
gold
standard
for
ESG-focused
clients.
Methodologically,
how
do
asset
managers
measure
the
key
performance
indicators
that
distinguish
one
label
from
another?
How
can
you
sufficiently
prove
that
a
product
meets
its
UK
SDR
label,
especially
for
“Sustainability
Impact?”
Distributors
may
also
find
these
labels
tricky
to
navigate,
as
confusion
around
labelled
versus
non-labelled
ESG-related
funds
will
be
challenging.
In
response
to
shifting
client
preferences,
distributors
actively
want
to
offer
labelled
funds
on
their
platforms.
However,
with
the
anticipated
low
adoption
rate
of
these
labels,
this
will
prove
difficult
in
the
short
term,
and
it
may
take
a
while
before
more
labelled
funds
are
widely
available.
The
counterargument
posits
that
this
high
barrier
to
entry
is
not
necessarily
a
negative.
As
with
everything,
it’s
all
about
perspective.
For
many,
the
high
standards
outlined
by
the
four
labels
demonstrate
a
long-term
commitment
to
sustainable
investing.
As
investor
preferences
shift,
the
FCA
aims
to
enable
the
end
investor
to
choose
from
best-in-class
sustainable
investment
products.
Therefore,
this
strict
criterion
will
showcase
the
(few)
products
that
meet
the
mark.
For
end
investors,
these
best-in-class
products
will,
in
theory,
be
more
transparent,
leaving
them
without
any
doubt
about
how
their
capital
has
been
allocated,
though
this
will
be
dependent
on
how
managers
report
on
their
alignment
with
the
labels.
This
transparency
is
seen
by
many
as
the
primary
intention
of
the
Sustainability
Disclosure
Requirements,
which
aims
to
combat
greenwashing
by
creating
a
best-in-class
overview
of
what
makes
a
“good”
sustainable
investment.
More
broadly
speaking,
when
it
comes
to
attracting
more
capital
inflows
to
sustainable
investments,
this
is
the
primary
scope
of
the
EU’s
SFDR
regulation.
Depending
on
your
jurisdiction
and
where
a
sustainable
fund
is
marketed
or
registered,
you
will
need
to
comply
with
one
or
both
regulations.
Morningstar’s
Data-Powered
Solutions
While
all
regulations,
from
SFDR
and
TCFD-aligned
reporting
to
the
UK
SDR,
have
unique
complexities,
they
are
united
by
a
singular
fact:
they
all
rely
on
high-quality
data
and
the
ability
to
report
transparently
and
consistently
under
each
of
these
disclosure
regimes.
That’s
where
Morningstar
comes
in.
Our
cutting-edge
suite
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solutions
is
fit
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the
future
demands
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regulators
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Trusted
Data
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Once
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Morningstar
Data
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provide
access
to
whole
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market
SDR
labels,
as
well
as
consumer-facing
and
product-level
documents.
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dangers
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greenwashing.
To
learn
more
about
the
UK
SDR,
how
it
will
impact
you
and
your
clients,
and
how
Morningstar
can
help
you
adapt
and
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SDR
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