SDR: the UK regulation on ESG funds to combat greenwashing

Disclaimer: this is an automated translation from Italian. Go to the original article.

The UK Financial Conduct Authority (FCA) has introduced the Sustainability Disclosure Requirements (SDR), a regulation aimed at ESG funds. The main objective is to combat greenwashing, improving the transparency of information provided to investors and increasing trust in sustainable products. This system imposes new standardized labels for investment funds, accompanied by strict disclosure requirements on the sustainability strategies adopted. The regulations are designed to ensure that funds cannot claim to be sustainable without adequate evidence, thus strengthening the credibility of the ESG sector and promoting a more transparent and responsible financial market.

The objectives of the SDR are clear: to combat greenwashing and provide investors with tools to distinguish truly sustainable funds. To achieve this goal, the regulation introduces requirements that oblige managers to provide detailed information about their ESG strategies and the real impacts generated. Furthermore, thanks to the adoption of standardized labels, investors can better understand the ESG characteristics of the funds, making more informed choices. This regulation aims not only to protect investors but also to encourage financial companies to integrate authentic sustainability practices, reducing the risk of misleading or inaccurate statements.

One of the most innovative elements of the SDR is the introduction of four labels that classify funds based on their approach to sustainability. The categories are: Sustainable Focus, for funds that prioritize sustainable assets; Sustainable Improvers, aimed at improving the ESG practices of companies in the portfolio; Sustainable Impact, which aim to generate a measurable positive impact; and Not Promoted as Sustainable, for funds lacking declared sustainable purposes. This labeling system is designed to make a fund's level of sustainable commitment immediately understandable, facilitating investor choices and encouraging greater transparency from managers.

SDR regulation imposes new transparency obligations on fund managers. They must provide detailed information about the sustainability objectives pursued and explain how ESG criteria are integrated into the investment process. They must also document the indicators used to measure sustainability performance, describe the methodologies adopted, and indicate the risks related to sustainable investments, specifying how they are managed. These requirements aim to ensure that investors have access to clear and verifiable data, reducing the risk of misleading claims and improving managers' accountability to their clients.

The UK SDR and the European SFDR share the goal of regulating ESG funds, but differ in approach. The SDR relies on intuitive labels to identify sustainable funds, while the SFDR classifies funds into articles 6, 8, and 9 depending on their level of sustainability. Additionally, the UK regulation does not adopt the "do no significant harm" (DNSH) principle, considered too restrictive, nor does it require alignment with the European taxonomy or the use of PAI indicators to assess adverse investment impacts. These differences reflect the different priorities of the two systems, with the SDR favoring simplicity and immediacy over the complexity of the SFDR.

Initially scheduled for October 2024, the entry into force of the SDR regulation has been postponed to April 2, 2025, granting managers more time to adapt. This postponement offers fund managers more time to prepare to meet the requirements without compromising operational continuity. The regulation represents a significant step forward towards creating a more transparent and responsible financial market, reducing the risk of greenwashing and increasing investor confidence in ESG funds. The UK's innovative approach could serve as a model for other nations, encouraging higher standards globally in sustainable finance.

This article was created as part of the project "Biodiversity services EU expansion" (CUP: E43D22000480009) funded by the Lombardy Region's "PR FESR 2021-2027 – LINEA INTERNAZIONALIZZAZIONE 21-27" call, aimed at supporting the internationalization of Italian companies. 3Bee is the naturetech company that develops innovative technologies for monitoring, protecting, and regenerating biodiversity, supporting companies in defining customized climate strategies based on the analysis of their impacts and dependencies on nature. With an established portfolio in Italy, Germany, and France, and significant partnerships, 3Bee continues its expansion in international markets to create a tangible impact through technology.