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What is SDR?

Introduction to SDR 

The FCA’s Sustainability Disclosure Requirements (SDR) and investment labels regime (PS 23/16) is a package of measures – introduced in November 2023, designed to improve transparency and trust in UK based retail funds that are promoted as having sustainability (and related) characteristics and strategies.

These rules were initially  ‘socialised’ in November 2021 in the UK government’s ‘Sustainable Investing Roadmap’.

Note: In April 2025 the FCA announced that plans to extend SDR to portfolios had been paused. In addition offshore funds are not yet in scope of the SDR regime.

The key elements are shown in the FCA graphic below (source SDR):

 

 

 

 

Understanding the new SDR rules:

The following is our understanding of the key aspects of the rules.  See below for links to the FCA website.

Note – Annex 2 of SDR provides a run through of the new rules in their entirety.

 

What is SDR?

SDR is a package of interconnected measures designed to ensure individual investors have access to reliable, decision-useful sustainability information.

SDR addresses a number of different aims, The paper refers to three core intended outcomes (see SDR PS23/16 figure 1).

The core aims can be summarised as intending to:

  1. Address greenwash in order to protect clients
  2. Increased sustainability information – to protect markets
  3. Consumers to make use of sustainable fund labels in order to improve competition

SDR comprises six new sets of requirements:

  1. Anti greenwashing rule. The anti-greenwash rule requires any references to the sustainability characteristics to be consistent with the sustainability characteristics of the product or service and for communications to be ‘clear, fair and not misleading’.  FG24/3 explains further – and includes examples, including reference to the need for references to be correct, clear, complete and able to be compared. See ‘Sustainability references should be:’ FCA image.

 

  1. Labels. From July 2024, in-scope funds that ‘intentionally’ focus on positive environmental and or social outcomes can choose to adopt one of four sustainability labels, subject to certain disclosure requirements. Broadly similar funds should indicate if they have chosen not to use a label (and meet certain rules).

 

  1. Naming and Marketing rules. Only funds that have adopted an SDR label can now have ‘sustainable’, ‘sustainability’ or ‘impact’ in their name. Similar terms (responsible, environmental etc) can be used, but must only be used to accurately describing alignment to fund activities – to guard against potentially misleading clients. This has led to many fund names being changed.

 

  1. Consumer facing information. Managers of labelled funds (and similar – which promote environmental and social characteristics) must publish a two-page  ‘Consumer Facing Disclosure’ (CFDs) which has prescribed content.  Unlabelled funds that are promoted as having significant environmental or social characteristics must also publish CFDs.

 

  1. Detailed information. Detailed pre-contractual sustainability information must be available – typically in a fund’s prospectus. Additional comprehensive fund and fund management entity level disclosures will also be required from late 2025 and 2026.

 

  1. Requirements for distributors. Distributors, such as platforms, are required to show which funds are labelled, with links to required information (CFDs and FCA labels page). This rule covers advisers also – the format is non prescriptive.

 

SDR Labeling basics 

Funds must meet specific requirements in order to use an SDR sustainability label.  Some rules apply to all of the labels, others apply to individual labels.  The rules allow for significant strategy variations, but all require a labelled fund to be focused on intentionally delivering positive environmental or social (sustainability) outcomes.   Key points of note include:

  • Only ‘in scope’ funds can opt to use an SDR label.
  • Labelled funds must aim to help deliver positive real world sustainability outcomes
  • SDR does not dictate fund sustainability strategies. A fund may focus on a single environmental or social issue, of a comprehensive range of sustainability issues.
  • Processes may be proprietary or aligned to an external service (such as an index) – however in either situation the fund manager is responsible for the strategy.
  • Labels are optional. Funds can also be ‘Unlabelled with sustainability characteristics’.  Additional disclosures are required for both.
  • Labels are not ‘approved’ by the FCA, however amends to pre-contractual disclosures – typically in a prospectus – are typically required.
  • Labelled funds must produce two page client facing disclosure documents (CFD), as must other UK domicile funds that are promoted as having significant environmental and social characteristics.
  • Labelling funds must aim to deliver positive environmental and or social outcomes (and the need for evidence)
  • At least 70% of a labelled fund’s assets must to align to the fund’s objectives – (fund managers must explain how this works in practice)
  • No labelled fund assets should conflict with the fund’s sustainability objectives
  • Labelled strategies must be verified; however this can be done inhouse – subject to the verifier being independent of the process – or by a third party.
  • Labelled fund Stewardship strategies must have escalation plans
  • Specific rules apply to each label (see below)

Requirements for all labelled funds include:

All funds that chose to adopt an SDR label are required to publish the following:

  1. Sustainability objectives
  2. Documented sustainability policies/strategies
  3. Sustainability KPIs
  4. Appropriate resources and governance
  5. Stewardship strategies

SDR labels – key differences

In scope funds that focus on positive environmental and or social outcomes may choose to use one of the following four labels:

Sustainability Focus –  these funds are required to publish ‘robust evidence-based standards that are an absolute measure of environmental and or social sustainability’.

Sustainability Improvers –funds that invest in assets that have the potential to improve their environmental and or social standards over time. These will typically lean in to stewardship activity more than funds with other SDR labels.  An asset’s path to improvement must be credible. Robust evidence is required.

Sustainability Impact – this label is  for funds with a pre-defined focus on the delivery of positive, measurable environmental and or social impacts. These funds must also have a ‘theory of change’ that describes how the product (eg fund) and, or its assets, will deliver positive impacts, using a robust measurement methodology.

Sustainability Mixed Goals – for in scope funds that combine two or more of the above approaches.

Unlabeled with sustainability characteristics.  In scope funds that have a significant emphasis on sustainability may chose not to use a label.  In such cases (there are many) they may be referred to as ‘Unlabeled with sustainability characteristics’ (or similar) . These funds must adhere to some of the additional labeling requirements – notably the publication of CFDs.

 

See the FCA’s SDR document PS23/16 and the FCA’s ESG Handbook for further information and to keep up to date with any possible changes.

 

Fund EcoMarket has a filter area which shows fund SDR status and labels.

What should advisers and other intermediaries do differently now?

Distributors, including advisers, are required to display / share SDR labels (and show if funds are not labelled), relevant documentation (eg CFDs) and a link to FCA labeling information.

The FCA has not prescribed how this should be done or the format, however the purpose is to ensure clients receive this information – so different methods are likely to suit different business models.

Our site has been updated to provide the source information intermediaries need.  The filter options show fund’s labelling status, and individual fund entries contain CFDs and links to fund websites.

Note – the FCA does not publish a list of labelled funds.

 

We publish a range of SDR information on Fund EcoMarket to help intermediaries understand and make use of SDR

This includes:

  • a filter area that shows individual fund’s SDR status eg in scope /out of scope / which label /unlabeled. (This can be used to generate fund lists).
  • fund specific information – text and url links are embedded within individual fund entries.  (This includes links to Consumer Facing Documents – CFD’s).

 

Additional reading / information:

We discussed SDR extensively at our conference on 3 October 2024.

This included presentations from the FCA’s Director of ESG Sacha Sadan and three groups of fund managers exploring different aspects of the new rules.

See 3 October 2024 SDR presentations and panels discussions here.

We also published a brief introduction to the new rules in January 2024:

 

Fund EcoMarket is free to use thanks to our fund manager partners (funds listed first with logos).

Go to the ‘SDR labelling’ filter is in the ‘Fund Basics’ section of the Fund EcoMarket database.

Our SRI Styles and filters are different from – but complimentary to – the SDR labels

Our SRI Styles are different from the FCA’s SDR labeling – they are based on our judgement, not that of others.  They compliment SDR as they are more granular and specific than SDR labels –  both can help an intermediary to ‘get started’ in this area.   (Our Styles predate the SDR regime by over a decade).

The styles give a flavour of both the lead ‘issue/s’ a fund focuses on (sustainable, environmental, social, ethical, faith) and the funds ‘approach’ ie the way in which issues are integrated into asset selection (ESG Plus funds and Sustainability Tilted funds tend to be less strictly screened/themed and Limited Exclusion tend not to have extensive sustainability strategies).

In addition, SDR only applies to a limited number of UK domiciled products at present – so the number of funds will be far smaller than the total Fund EcoMarket cohort for some time.  Users should also note that SDR remains ‘work in progress’ (many funds are still in the process of applying to use labels) and many good have opted out of the regime for various reasons – including implementation issues.

Please be aware however that this is a fast changing situation at present and the following are simply our opinions, this will continue to evolve…

How do our individual ‘SRI Styles’ map to the FCA’s SDR labelling regime?

  • Sustainability Style – we expect most funds of this kind to be broadly in line with the SDR labelling regime  – although funds may be ineligible or unwilling to adopt labels at this time.  These are most likely to be Focus or Impact labels, depending on their strategy.
  • Environmental Style – we expect many funds of this kind to be broadly in line with the SDR labelling regime – although funds may be ineligible or unwilling to adopt labels at this time. These are most likely to be Focus or Impact labels, depending on their strategy.
  • Social Style – we expect many funds of this kind to be broadly in line with the SDR labelling regime – although funds may be ineligible or unwilling to adopt labels at this time. These are most likely to be Focus or Impact labels, depending on their strategy.
  • Ethical Style – we believe many funds of this kind will be suitable for clients with an interest in sustainability however because of the design of the SDR labels most are unlikely to meet the criteria so may opt for ‘Unlabelled with sustainability characteristics’, or be referred to as ineligible.
  • Faith Style – funds of this kind are unlikely to be aligned to SDR
  • Sustainability Tilted funds – some funds of this kind may be suited to SDR, although others may not.  For managers who decide to adopt a label the most likely label would be the ‘Improver’ as selection tends to be less strict than some other styles.
  • ESG Plus – some funds of this kind may be suited to SDR, although will may not.  For managers who decide to adopt a label the most likely label would be the ‘Improver’ as selection tends to be less strict than some other styles.
  • Limited Exclusions – funds of this kind are not likely to align to the SDR labelling regime typically because of their lack of positive focus.

Please note the comments above do not indicate ‘suitability’ – users are recommended to use individual fund and fund manager filters to match client aims to fund or product options.

Where can I find further information?

We aim to keep tabs on SDR developments via our blogs, which include both FCA news and our own commentary.  

Please be aware – some of this may no longer be current.

The most important current links to FCA information are listed below:

Other relevant compliance links: