We estimated that just over 200 funds could be labelled, and that the 'sustainability focus' label would be the largest, with firms intending to apply the label to around 100 funds.
While this snapshot demonstrates the growing role SDR will play in sustainable and responsible investment, this picture is likely to have shifted.
We also estimated that a further 300 UK-domiciled funds would have to produce consumer-facing disclosure documents as non-labelled funds with sustainability characteristics – funds applying exclusions would fall into this category.
Following the challenges firms have faced in meeting the deadline, there are likely to be fewer labelled funds than originally estimated coming onstream in December and the non-labelled fund category will be larger.
However, we are hopeful that the FCA’s recent decision to provide limited temporary flexibility will give firms much-needed additional time to comply and we expect the market share to continue to grow throughout 2025.
FTA: How do you see labels being applied in the passive space?
CT: We share the FCA’s goal for the SDR and labelling regime to be compatible with index funds and funds invested in bonds.
The regulator noted that the labels’ qualifying criteria were designed to accommodate both active and passive strategies, where for passive strategies the product tracks an index that meets the criteria for a label.
Of the four labels available to the market, it was envisaged that the 'sustainability improvers' label would be what most index funds would gravitate towards – for example, there are a number of indices constructed according to climate transition benchmark rules.
However, some ambiguity and a number of hurdles remain and more work with the FCA and industry is needed to ensure that funds that legitimately contribute to positive sustainable outcomes (and which, therefore, investors may expect to be labelled) do not fall outside of the regime.
FTA: And what about bonds?
CT: When it comes to bonds, while our research suggests that funds investing in equities will make up 55 per cent of labelled funds, a further 12 per cent will come from bond funds.
There are already funds investing in bonds issued to help fund environment or social initiatives, including green bonds.
For example, in the UK, the government raised £9bn in green gilt transactions throughout 2022-23.
Views from our member firms differ on whether funds investing in government bonds as part of their core investment strategy could meet the sustainable label criteria – a third believe they can – and it will likely be those using sophisticated metrics and robust, evidence-based standards to assess the sustainability of governments that will get labels.
