Five Key Insights from Early Adopters of SDR

The Sustainability Disclosure Requirements (SDR) introduced four voluntary labels with the aim of enhancing transparency and comparability within the asset and wealth management industry. Initial adoption of labels has weighted heavily towards the Sustainability Focus label. Sustainability Mixed Goals has been the least adopted undoubtedly due to the complexities of having to meet multiple labelling criteria. We expect Sustainability Impact and Sustainability Improver labels to be broadly equally over the year. The largest category is unlabeled funds using sustainability characteristics which we expect to increase further.

Labeled funds and unlabeled funds using sustainability characteristics are required to produce a Consumer Facing Disclosure (CFD). This is aimed at providing retail investors with essential information about the fund’s sustainability practices to make more informed investment choices.

At Alpha FMC, we benchmarked 25 CFDs across 14 asset managers to identify best practices across the following criteria: format, goals and approach, metrics and methodology, location and accessibility. In this article, we share our key takeaways that can guide asset managers to enhance their disclosures and align with both regulatory requirements and investor expectations.

92% of asset managers published their CFDs as a standalone document containing the required sections. Our review highlighted little consistency across asset managers other than adherence to the prescribed length. We have highlighted some good practices below:

• Length and Design: All CFDs were under two pages as per the requirements with a simple design. Some asset managers enhanced their disclosures with additional icons or color schemes, improving overall readability.
• Visual Representation: Only 15% of CFDs included graphs or visual data representations, enhancing engagement and understanding.
• Additional Resources: 30% of asset managers included a link to an external glossary, offering a better understanding for retail investors and underpinning the Consumer Duty requirements which asset managers are already subject to. The remaining 70% did not explain key terms.

Due to the distinct approaches adopted by each fund, investors may struggle to make direct and meaningful comparisons between CFDs alone across investment criteria, selection process and engagement strategies. Our analysis revealed some common disparities:

• Investment Criteria: Most funds set out what their funds do and do not invest in, offering insights into the sustainability ethos underpinning their investment strategies. Some funds also went beyond the 70% threshold and codified this within the investment objective.
• Selection Process: 65% of funds offered robust explanations whilst others were vague on the investment selection process. In addition, there were some targeted investments and the risk resulting from the reduced investment universe was not always made clear.
• Engagement Strategies: Whilst there is a notable emphasis on portraying fund engagement strategies, the depth and clarity of these descriptions varied greatly, affecting overall transparency and understanding.

We also assessed the underlying data and methodology, surfacing the importance of having clear performance metrics and highlighting any data limitations:

• Metrics: For labelled funds, only 30% of CFDs integrated metrics supporting the Key Performance Indicators (KPIs). This should be revisited in light of the FCA’s proposed amendments to SDR.
• Data Vendors: A third of asset managers disclosed which data vendors they used, which supports the ‘Comply or explain’ principle set out by the FCA. The majority did not set out any data or methodology limitations.

The online location of the CFDs also plays a crucial role:

• Accessibility: Only 20% of asset managers created a dedicated SDR page on their website whereas the remainder embedded CFDs within the individual fund pages. The regulations specify that the CFDs should be displayed in a ‘prominent place’, therefore, asset managers should consider the addition of a dedicated SDR page.

Based on our review, we recommend five key actions for asset managers looking to enhance their Consumer Facing Disclosures:

1. Consider Consumer Duty: Review and test the display and format of the CFDs to ensure alignment with Consumer Duty obligations. For example, include visuals where appropriate, define key terms and review whether the design is engaging.
2. Full Compliance with SDR Requirements: Assess whether the sustainability metrics have been fully disclosed in light of the proposed amendments to SDR.
3. Transparent Data Sharing: Be transparent about the data being used, highlighting data sources and any potential gaps in the information presented.
4. Clarity on Sustainability Approach: Clearly articulate the approach including the selection process and engagement process to improve investors’ understanding and trust.
5. Consider adding a dedicated SDR webpage particularly if you have several funds with a label or which are captured under the Naming and Marketing Rules.