ESG-related investing has increased greatly over recent years, with growing demand from clients and investors for investments with a positive environmental or social impact. ESG matters are increasingly key to the activities of listed companies, regulated firms and consumers. The FCA’s research shows that over 80 per cent of consumers want their money to do good as well as deliver a return. The alternative funds industry has an important role to play in the transition to a more sustainable future.

However, it can be difficult for investors to navigate the sustainable investment market. The fact that firms use various sustainability-related terms interchangeably, and the lack of standardised accessible information, can make it challenging and confusing for investors.

With the growth in this market and in sustainable products, regulators have become concerned that some firms may be making misleading or exaggerated sustainability-related claims about their products. This is becoming a major focus for regulators around the world.

The EU led the way with the introduction of the Sustainable Finance Disclosure Requirements (SFDR) in March 2021. This applies to EU asset managers and advisers and non-EU firms that are marketing their products into the EU. The European Securities and Markets Authority (ESMA) is also introducing guidelines on ESG and sustainability terms in fund names. In the US, the SEC is introducing climate-related disclosures for public companies but the rules for asset managers have not yet been finalised or implemented. 

Following the FCA’s introduction of Task Force on Climate-Related Financial Disclosures (TCFD) aligned reporting for the largest asset managers in January 2022, the regulator has introduced a further package of measures to protect consumers and improve trust in the market for sustainable products in the form of the Sustainability Disclosure Requirements, or SDR. These address greenwashing concerns, labelling of funds, transparency of information, use of sustainability-related terms and consistency and adequacy of disclosures. 

While international regulators collaborate on sustainability-related regulation, the current lack of harmonisation across the different jurisdictions makes it challenging for firms that have a global footprint to comply with a diverse set of rules. We expect to see further evolution of sustainability regulations over the coming years, hopefully working towards further global consistency.

This Guide focuses on the FCA’s SDR and we hope this provides a useful overview of the requirements, as well as practical guidance for asset managers.