The SDR is a more holistic package of measures in that sense, incorporating elements of the SFDR but also environmental, social and governance-related fund labels, which have existed for many years in local EU countries (for example, Label ISR in France, Towards Sustainability in Belgium), as well as the recently published rules from the European Securities and Markets Authority on fund naming.
Key requirements for wealth managers
With a wide universe of funds that purport to have a sustainability focus, or even just an element to their investment thesis, the SDR will effectively sort the wheat from the chaff.
There is concern from the FCA that some wealth managers will look at the requirements and attempt to reverse engineer funds to meet the labelling benchmarks, instead of setting out to provide products that meet the spirit of the new rules.
Therefore, the most sensible initial step for wealth managers would be to identify the funds they steward that align with the spirit of the regulation. These funds should be the first to proceed with the new labelling. In this way, companies are not rejigging portfolios to meet certain desires to be seen to be sustainable, but rather working to give funds that already do it the SDR seal of approval.
Once companies have identified the funds that already meet the goals in terms of allocation and objectives, it then makes sense to focus on ensuring the added extras that go with the framework are applied.
How far along in this process are most managers?
Research from the Investment Association conducted between March and April 2024 regarding SDR adoption found that just under 40 per cent of UK fund managers had no plans to introduce the SDR labelling, with 7 per cent believing they would never get one.
Although we would expect these numbers to grow as the benefit of the framework becomes clearer, any regulatory transition requires entity-level understanding of the pathways to compliance, which some organisations will not be well equipped to handle.
It is fair to say that those, like us, who have dealt with similar requirements in other regulatory spheres such as with the SFDR, for example, will find there is an existing knowledge base.
What do advisers need to know?
In our view, the rules should be seen as a good opportunity to better assess, articulate and illustrate the qualities of funds being offered to clients. There is a high bar to qualify for labelling, which is no bad thing, but this will make early adoption smaller than some may anticipate.
