Sustainability Disclosure Requirements (SDR) and Investment Labels – 5 Key Operating Model Impacts for Asset Managers

Following the long-awaited publication of the Policy Statement (PS23/16) on SDR and investment labels in November 2023, the industry has been busy reading and digesting the final rules.

In our previous article we outlined the key talking points we were looking out for in the Policy Statement. Now that the rules have been published (along with an open consultation paper relating to the anti-greenwashing rule, and future consultations due on portfolio management services and overseas funds,) we explore five practical operating model impacts we are seeing our asset management clients focus on as they ramp up their SDR programmes.
(Please note, this is not intended as a summary of the rules).

A mapping against Alpha’s proprietary ESG & Responsible Investment functional assessment framework

The sustainability labels are the most visible element of SDR, and many firms used the consultation period to conduct indicative mapping between the draft rules and their products. Next steps here might include:

• Labels: Formalising product classifications and specifying timeframes for those with clear eligibility for a label, and others which may want one but do not yet meet the qualifying criteria
• Modifications: Designing any change to investment policies, strategies and product documentation (including possible shareholder notification in accordance with the FCA’s Collective Investment Scheme rules)
• Reporting: Considering not only the up-front qualifying criteria, but the ongoing compliance and reporting requirements brought about by the labels, and planning ahead for the operational implications

Compared to the Consultation Paper, the time between the Policy Statement (28^th November 2023) and the date from which labels can be used (31^st July 2024) has been shortened from 12 to 8 months. This suggests the FCA anticipates strong client demand for investment labels and early take-up from managers. Client-facing teams should be prepared to do the following:

• Queries: Respond to queries about the labelling of funds and their rationale, and anticipate any pre-requisites from strategic or high-priority client segments
• Engagement: Engage early with clients on their preferences and expectations, exploring commercial opportunities beyond just compliance
• On-Demand: Get ahead of the on-demand reporting requirements, and consider what an appropriate servicing model for such eligible clients might look like

The KPIs to measure performance towards sustainability objectives have deliberately not been prescribed by the FCA. Firms will need to start identifying these early, as they are to be reported up-front as part of consumer-facing and pre-contractual disclosures, as well as in ongoing reporting.

• Plan Ahead: Given the lead times required for defining new requirements and possibly onboarding new data providers, this should be high on the agenda
• Integration: KPIs should be integrated into robust investment and oversight processes, with reasonable guardrails set around them to ensure remedial action can be taken when needed
• Solution Design: In parallel, focus will be on designing a scalable and integrated reporting solution for consumer-facing, pre-contractual, product-level and on-demand disclosures

Stewardship is a core component of the general qualifying criteria for investment labels and is a particular focus area for the Sustainable Improvers label. While firms are not expected to demonstrate a causal link between stewardship activity and sustainability outcomes, they will need to have in place:

• Framework: A robust stewardship framework commensurate with a product’s sustainability objective, including the specific activities to be undertaken, timeframes, and outcomes sought
• Escalation: Plans for assets not meeting a fund’s sustainability objective, as per the FCA’s intention for compliance with labelling criteria to be a proactive, ongoing effort by firms
• Tracking: Well-structured engagement activity with the right tools to capture, centralise and track engagement activity across the business

Many firms are already addressing the anti-greenwashing rule, since this had been expected to come into force immediately. Now that firms have until 31^st May, we are now seeing them use the extra time to:

• Awareness: Run briefing sessions for teams on the implications of the anti-greenwashing rule and make updates to marketing approval checklists and compliance manuals
• Independent Assessments: Interpret the requirement for an independent assessment of the ‘credible standard’ of sustainability, explore whether to conduct this internally or externally, and if internally, which function is best placed to lead on this
• Oversight: Review their sustainability risk approach more broadly, formalising oversight roles and responsibilities with regards to the specific commitments products will make under SDR