The UK’s Financial Conduct Authority (FCA) has introduced its Sustainability Disclosure Requirements (SDR) and investment labels framework, a set of measures designed to enhance transparency in sustainable investment products and combat greenwashing.
Scheduled to come into effect on July 31, 2024, the framework includes four consumer-focused sustainability labels: Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals.
Morningstar’s recent research, UK SDR Through the Looking Glass, delved into these labels, offering early insights into the potential landscape of UK sustainability-labelled funds by year-end.
In an optimistic scenario, Morningstar estimated that around 300 UK open- and closed-end funds would adopt a label by the end of the year, constituting 8% of funds domiciled in the UK and less than 3% of all funds available for sale.
Anticipating Sustainability Focus as the predominant label, the research indicated that equity funds may represent over half of the labelled product universe while fixed-income and passive funds will be significantly underrepresented (each accounting for less than 10% of labelled products). According to the researchers: “There should be more options in the labelled allocation funds space by the introduction of the “Mixed Goals” label.”
While reasons for label adoption include investor demand and competitive pressure, some managers may find the requirements too restrictive and adopt a cautious approach. Morningstar emphasised that labels, while valuable, should be viewed alongside other fund data and information.
“The success of the UK labelling regime will lie in the quantity and quality of the products that get labelled,” said Hortense Bioy, global director of sustainability research, Morningstar. “We hope this early analysis will contribute positively to these conversations for the benefit of investors not only in the UK but also other jurisdictions as they look to implement similar regulatory frameworks”.
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