SDR Label Approval “Logjam Starting to Ease”
After muted early expectations, impact label under the UK’s green fund rules has outperformed expectations, reflecting global growth trend.
Accelerated approval of fund labels under the UK’s Sustainability Disclosure Requirements (SDR) is giving asset managers hope that the end of a challenging teething process is within sight.
Yesterday, M&G Investments became the latest manager to adopt the Sustainability Impact label for one of its funds, following a fortnight accelerated approvals which has seen SDR label adoption approximately double to nearly 40.
Earlier this week, Columbia Threadneedle confirmed the adoption of SDR Sustainability Focus labels for nine funds, while asset manager Fidelity International recently confirmed plans for three of its funds to use the same label.
“In the last few weeks, the logjam seems to be starting to ease and we’re hopeful that’s going to see a trickle turn into a stream of new funds approvals coming through,” said George Latham, Managing Partner at WHEB Asset Management, speaking at the organisation’s annual investor conference.
The number of funds with an SDR label passed ten just two weeks ago, with global investment manager Ninety One and EdenTree Investment Management both receiving impact labels. Both WHEB and Ninety One highlighted the challenging process of attaining a label, with latter calling on the FCA to accelerate the process.
“There is still an opportunity for SDR to capitalise on impact and drive more capital into having a positive impact on the real world and society.”
Impact in demand
Finalised by the Financial Conduct Authority (FCA) in November 2023, the SDR’s naming and marketing rules for green funds mean UK-domiciled products wanting to use certain terms – including ‘impact’ and ‘sustainability’ – in their names must comply with the terms and conditions of one of four SDR labels.
Firms have been able to apply the labels since the end of July, but in early September WHEB became just the second manager to be granted any SDR label. The other, Natixis Investment Managers’ AEW, also adopted the impact label.
More than 1,200 funds in the UK were expected to be affected by the SDR’s rules, and an estimated 400 funds had applied for labels by the end of August.
“We had been waiting on the FCA’s policy statement on SDR for over a year and once it was published, we moved quickly towards adopting the impact label,” said WHEB’s Latham. “There was a lot of optimism at the time about SDR being a well framed piece of regulation with the potential to be well embraced and widely adopted, but the industry has found it very difficult to adopt.”
Jake Moeller, Associate Director of Responsible Investment at investment consultant Square Mile, said challenges in obtaining approval were widespread.
“I know from having spoken with 70 or so fund groups how difficult the process of attaining a label is,” he said. “There are a lot of fund groups who thought that it was going to be an easy thing to get an impact label, but that has not been the case.”
The FCA has acknowledged the label application process had taken longer than expected. The rules had been due to come into effect fully on 2 December, but the authority has offered asset managers temporary flexibility to comply until 2 April next year.
Phil Spyropoulos, Financial Services Partner at Eversheds Sutherland, suggested the FCA may have responded to industry feedback over the difficulty in adopting SDR labels. “The FCA possibly has now decided to slightly change tack. It’s going to rely a little bit more on supervision of funds than setting the bar too high and seeing nobody meet it,” he said.
Invigorated impact
Impact had been projected to the least used SDR label, accounting for just 11% of all labelled funds in a Morningstar report, while the Investment Association separately forecast the label to be applied to a tenth of labelled funds, representing £4.5 billion in funds under management.
The impact label indicates to investors that a fund invests with an aim to achieve a predefined, positive and measurable environmental and/or social impact.
A report by the Impact Investing Institute released in September found that at least 18 of 72 UK based investment managers are planning to launch or align funds against the Sustainability Impact label. Reasons cited by managers for not currently seeking the label included “waiting to see how other firms fare first”.
“Impact investing is still a pretty new concept, and until the introduction of SDR and the momentum that created, it hadn’t really been formalised or popularly recognised,” said Latham.
Last month, the Global Impact Investing Network rated the worldwide market at US$1.6 trillion, an increase of more than US$400 billion from 2022. Meanwhile, the Impact Investing Institute said the UK impact investing market accounts for approximately 8% of the global impact investing market.
The UK impact investing market had grown to £76.8 billion (US$97.4 billion) in AUM by the end of 2023, a £19.3 billion increase from its inaugural 2022 report. Impact investing accounts for just under 1% of the whole UK investing market.
“We need more impact and we need people to be aware of the SDR labels,” said Moeller. “I’m confident that fund flows will slowly change, but we need to get money into these funds to make a difference.”
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