21st March 2024

Navigating SDR: Implications for Advisers and Clients

In our ongoing exploration of the Sustainability Disclosure Requirements (SDR) policy statement by the Financial Conduct Authority (FCA), we have examined its foundational principles and the introduction of new fund labels for sustainable investments. Now, let's turn our attention to the practical implications of SDR for advisers and clients navigating the complex terrain of sustainable investing.

For advisers, the implementation of SDR will both help facilitate and necessitate a deeper understanding of sustainable investment strategies, fund labels, and disclosure requirements. With the introduction of specific labelling criteria and disclosure mandates, advisers must carefully evaluate the alignment of investment options with clients' sustainability preferences and financial objectives. This entails not only assessing the sustainability objectives of labelled funds but also considering their investment strategies, governance frameworks, and stewardship practices.

Moreover, advisers play a crucial role in educating clients about the nuances of sustainable investing, helping them make informed decisions that align with their values and long-term financial goals. By facilitating transparent communication and providing comprehensive insights into fund characteristics and performance metrics, advisers can empower clients to navigate the evolving landscape of sustainable investment opportunities.

For clients, SDR offers enhanced transparency and accountability in sustainable investment offerings, enabling them to identify funds that align with their environmental, social, and governance (ESG) preferences. The introduction of fund labels and disclosure requirements facilitates informed decision-making, allowing clients to assess the sustainability credentials and impact of investment options.

However in order for SDR to ensure better outcomes it willl require some additional effort on the part of both advisers and clients. While the adoption of fund labels signifies a commitment to sustainable investing principles, it is essential to look beyond the labels as there are many potentially appropriate funds that are either not yet covered by the labelling regime (eg SICAVs) and there are related funds that are unlikely to adopt labels  because their strategies do not align sufficiently closely to the new rules (eg ethical funds).  Overlooking such funds would, in many cases, not enhance client outcomes. However it is early days.  Our expectation is that the landscape will evolve over time in order to clarify such issues.  And of course, continuing to evaluate the underlying investment strategies, the specific issues a fund considers (where it will and won’t invest) and conventional financial metrics will also remain important.

As SDR continues to shape the landscape of sustainable investing, advisers must remain proactive in staying abreast of regulatory developments, industry best practices, and emerging trends. By embracing a holistic approach to sustainable investing, advisers can serve as trusted guides in helping clients achieve their financial objectives in a way that recognises the financial and real world realities of transitioning to a more sustainable future.

In conclusion, SDR represents a significant milestone in advancing transparency, accountability, and sustainability in the financial industry. By leveraging the insights and guidance provided in this series, advisers and clients can start to navigate the complexities of SDR , which will help them be play their part in the shift towards a more sustainable and inclusive future for all stakeholders, which is vital if we are to address climate change and other existential threats.

This article is adapted from a longer article.

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Julia Dreblow is a founder of SRI Services and Fund EcoMarket, FCA DLAG member, BSI fund standard lead author and Vice Chair of the new industry-led ‘Adviser Sustainability Group’

Investments, Ethical/ESG