The U.K.s Sustainability Disclosure Requirements (SDR) and the EU’s Sustainable Finance Disclosure Regulation (SFDR) are regulations focused on sustainable investment. As they evolve, they’ve added increasing complexity for fund managers. One example is the differences between the two sustainable regulations.
While the U.K.’s SDR is considered primarily a labeling regime, the SFDR has been in effect longer and operates as a comprehensive disclosure regime. The SDR’s new anti-greenwashing rule, which recently came into effect, illustrates how the environments continue to change and why understanding the differences between these two regimes is important for investment firms and other stakeholders operating in the U.K. and Europe.
The new SDR anti-greenwashing rule
The SDR’s anti-greenwashing rule came into effect on May 31, 2024, mandating that all sustainability-related claims must be “fair, clear, and not misleading.”
The Financial Conduct Authority (FCA) specified what firms need to do to comply, which could pose significant challenges for firms in terms of providing evidence to support their claims. Providing this evidence is expected to create significant operational burdens, due to the need for detailed data management and granularity in reporting. SDR communications must be thorough and avoid the omission of any key information.
Anti-greenwashing has been prominent in the EU’s financial sector policies. Beyond SFDR, the European Securities and Markets Authority (ESMA) has suggested guidelines on fund names, for instance. However, compared to SDR, there is no specific anti-greenwashing rule in the EU’s financial sector.
How labels and categories work as sustainability objectives
Under the SDR, investment products using sustainability labels must have a clear, specific, and measurable sustainability objective. They must show an intent to invest with the aim of directly or indirectly improving or pursuing positive environmental or social outcomes.
The SFDR categorizes financial products into distinct types, defined through transparency obligations rather than the scope of sustainability. For example, Article 8 products promote environmental or social characteristics, while Article 9 products have sustainable investment as their objective.
Significantly, there has been an industry split1 following the European Commission’s consultation on what the basis for a new product categorization system should be. Firms will need to monitor developments in this categorization system because change may be on the horizon in the EU.
What are the investment thresholds for SDR and SFDR?
For each label under SDR, a minimum of 70% of assets must be invested according to an evidence-based standard that is an absolute measure of environmental or social sustainability.
In contrast, SFDR funds do not have a specific, percentage-based sustainability threshold to meet. Instead, they must justify any proportion of their investments which does not fall under the sustainability umbrella.
Stay ahead of ESG compliance: managing SDR and SFDR effectively
Sustainability and the broader ESG space remain critical regulatory and compliance considerations for fund managers in the U.K. and Europe.
Navigating the differences between SDR and SFDR rules is essential for firms operating in both markets. With new SDR anti-greenwashing rules coming into effect and with the EU’s consultation on SFDR, both regulations are evolving. It’s essential that fund managers stay on top of any future developments.
Understanding regulatory frameworks and their implications is crucial for staying compliant. CSC can help streamline fund operations and enable managers to scale across asset classes and jurisdictions. Find out more about our solutions and how we can support your sustainable investment strategies.
- https://www.ipe.com/news/sfdr-feedback-report-confirms-market-split-over-labelling-categories/10073168.article ↩︎
