UK Sustainability Disclosure Requirements (SDR) – regulation memo

Introduction

As a key part of the UK Government’s Green Finance Strategy, the long heralded UK Sustainability Disclosure Requirements (UK SDR) are now on the final countdown to implementation. The UK SDR regulatory framework is aimed at enhancing transparency and accountability regarding sustainability factors in financial markets.

The UK SDR requires:

• UK asset managers with in-scope funds* to disclose how they integrate environmental, social, and governance (ESG) considerations into their investment decisions and risk management processes
• Distributors to ensure all relevant disclosures for funds are available to UK retail customers, including a note for overseas funds explaining they are not in scope of the UK reporting requirements
• All FCA (Financial Conduct Authority) regulated firms to ensure they comply with Anti-Greenwashing rule and final guidance

*In scope funds detailed in subsequent sections

UK SDR: background and international context

Who is impacted by UK SDR?

The various elements of UK SDR impact different types of market participant in different ways.

Party	Scope of regulations
UK asset managers	• Investment labels • Product-level disclosures • Consumer-facing product-level disclosures • Naming and marketing rules • Entity-level disclosures if assets under management (AUM) equal or greater than GBP 5 billion
Distributors (e.g., financial advisors, platforms, etc.)	Ensuring relevant labels and disclosures are available to UK retail consumers
All FCA authorised firms	Anti-greenwashing rules
Out of current scope – subject to subsequent consultations: Non-UK asset managers whose funds are distributed to retail investors UK asset managers whose funds are restricted to institutional investors UK portfolio managers and UK wealth managers

And whilst each rule stands in its own right, the size of the population impacted by each can be seen as scaling inversely with the effort and cost of complying.

What funds are in scope of UK SDR?

• UK funds that are available to UK retail investors where the asset manager wishes to make a sustainability claim or use any sustainability-related language
• Overseas funds marketed into the UK are currently explicitly out of scope but must carry a prominent notice advising consumers that the product is based overseas and not subject to UK SDR. This will be subject to further review as part of the ongoing Overseas Fund Regime (OFR) planning
• UK asset managers with pure institutional investor funds, wealth managers, and portfolio managers are currently out of scope but this will be reviewed in a subsequent consultation on the evolution of UK SDR

What are the investment labels of UK SDR and how do they apply to funds?

Label	Criteria
Sustainability impact	Must have a sustainability objective to invest at least 70% of assets to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome. Firms must explain how their investment activities will achieve the desired impact.
Sustainability focus	Must have a sustainability objective to invest at least 70% in assets that are environmentally and/or socially sustainable with a robust, evidence-based absolute measure.
Sustainability improvers	Must have a sustainability objective to invest at least 70% in assets that have the potential to improve environmental and/or social sustainability with a defined timeline, KPIs, defined evidence-based monitoring of progress.
Sustainability mixed goals	Added to the list of labels following industry responses to CP22/20. Must have a sustainability objective to invest at least 70% of assets in accordance with a combination of the criteria for the other labels.
All labels	Labelled products must not contain any asset in conflict with the sustainability objective
	Labelled products must have a primary objective based on sustainability that is “clear, specific, and measurable” as part of the product’s investment objectives, not just basic ESG integration intentionality
	Firms must identify and disclose relevant KPIs to measure progress against the stated sustainability objective.
	Within their stewardship strategy firms must define and disclose an escalation plan to be able to take action when assets do not deliver required progress against the sustainability objective or KPIs.
Non-labelled with additional disclosures	Products that do not elect to use a specific label but still comply with naming and marketing rules and provide disclosures may still use limited sustainability-related language

What disclosures do firms need to produce under UK SDR?

As with much UK regulation, the FCA has taken a principle-based approach to the regime rather than the prescriptive approach seen in some other jurisdictions, which is particularly apparent with the disclosure requirements.

Product-level disclosures

For any products wishing to use sustainability-related language, pre-contractual and ongoing disclosures are required regarding the investment policy, strategy, and metrics while labelled products must additionally disclose how the product meets the specific qualification criteria for the label. For the “Sustainability Mixed Goals” label, the product must disclose the proportion of assets aligned with each of the other labels.

Entity-level disclosures

In-scope firms must disclose their governance, strategy, risk management, and metrics/targets in relation to sustainability-related risks and opportunities. Where firms have labelled products or non-labelled products with sustainability-related terms, they must additionally explain the resources, governance, and operational setup supporting the products. These requirements build upon existing TCFD (Task Force on Climate Related Financial Disclosures) entity reporting.

Consumer-facing disclosures

For labelled products or non-labelled products with sustainability-related terms, a clear, concise disclosure, not exceeding 2-pages must be prominently displayed in the relevant digital channel with hard-copy available on demand. It must include the sustainability objective and associated label (or statement that it does not have a label), the investment strategy, metrics, and where additional information can be found.

No specific templates have been defined by the FCA. It is for UK asset managers to determine their individual approach within these overarching principles.

Securities Services’ view

The scale of the impact of UK SDR on UK asset managers will vary dramatically. Operationally, the fund label element of the regime is ultimately voluntary, insofar as managers who do not wish to use sustainability-related language do not need to take any action on that component or provide product-level disclosures. In contrast, those wishing to label their products will need to actively work on their description of objectives, KPIs, metrics and disclosure formats, with much of the analysis also required for non-labelled funds with sustainability-related terms. Care needs to be taken where managers also manufacture EU SFDR products to avoid excess costs where data and metrics are not complementary, albeit these managers will likely have more established in-house ESG capabilities and existing vendor/provider relationships servicing their data needs. In contrast, those with pure UK product ranges may find this level of reporting scrutiny more challenging.