Eight in 10 (80%) investment firms believe that the Sustainability Disclosure Requirements (SDR) regime has successfully prevented misleading claims about sustainability products, but implementation challenges remain, according to the Investment Association (IA).

The IA’s SDR Implementation Survey found that 39% of firms had already adopted a sustainability label for at least one of their funds.

However, the number of firms that adopted labels was significantly lower than expected, with just 106 labelled funds in the market compared to the anticipated 216.

The Sustainability Focus label was the most popular label, with 63 funds approved, followed by Sustainability Impact (22), Sustainability Improvers (17), and Sustainability Mixed Goals (4).

Nearly all (91%) of the firms adopting an SDR label had updated the labelled fund’s investment policy or strategy to be more transparent on the fund’s sustainability approach, while 83% had added a sustainability investment objective for at least one fund.

Implementation challenges

However, the IA noted that the FCA authorisation process had not been without its challenges, after finding that 49% of firms had at least one fund they considered adopting a label for but subsequently deciding not to, with 32% making this decision after going through the FCA’s authorisation process.

For those firms who successfully applied for a label, formal applications had to be withdrawn and re-submitted three times on average for their first labelled fund.

Almost four in 10 (39%) felt that the SDR regime would make it easier for investors to find and compare non-labelled funds with sustainability characteristics, while 35% believed the SDR framework gave sufficient flexibility to accommodate different sustainable investment approaches.

Despite this, investment firms were unsure whether SDR would result in more money being invested into sustainable products, with just 14% believing that SDR would result in more capital flows into such funds over the next three years.

Naming and marketing rules

Naming and marketing rules were found to have had a broader impact, with 80% of respondents having non-labelled funds that are subject to additional disclosure requirements under these rules.

There were at least 340 funds that fall into this category, more than three times as many funds as those that have a label.

The most common approaches taken by these funds were negative/exclusionary screening (83%), ESG integration (75%) and positive tilt (55%).

More than half (55%) of firms had to make changes to their funds in light of naming and marketing rules, with 28% replacing a restricted term with a non-restricted term in the fund name, and 26% removing a restricted term from a fund name.

“It’s encouraging to see the results of our SDR survey - the regime has improved transparency, and labels set a minimum standard for sustainable investing and clearly signpost approaches to investors,” said IA director of market insights, Miranda Seath.

“This should help to strengthen consumer confidence in choosing sustainable funds. Although there are fewer labelled funds than originally anticipated, a quarter of firms tell us that they will seek labels for funds in the next one to two years. We expect to see more approved labels for funds throughout 2025, as firms and the regulator get to grips with implementation.

“Whilst our research with investors shows that they see SDR as helpful to compare sustainable funds, our latest implementation survey reveals that there is still doubt amongst firms that this will drive more capital into sustainable products.

"Moreover, nearly two fifths of firms told us that that the authorisation process took longer than 20 weeks. It is important that the lessons from the first phase of SDR implementation are learnt should the regime be eventually applied to overseas funds and portfolio management services.

“We continue to look at how SDR works alongside SFDR to push, were possible. for robust and globally compatible standards that enhance investor understanding and trust in sustainable investing.”

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