New report from UKSIF and PwC UK on the FCA’s SDR and investment labelling regime

The UK Sustainable Investment and Finance Association (UKSIF) and PwC UK have today released a joint report on the implementation of the Financial Conduct Authority’s (FCA’s) Sustainability Disclosure Requirements (SDR). The report draws on interviews with asset managers representing £19 trillion in assets under management (AUM) and 29 labelled funds, as well as insights from ongoing engagement with other firms impacted by the regime.

The paper states that, since its publication by the FCA in November 2023 and subsequent implementation, the SDR has served as a key market guardrail for the UK investment industry, helping to prevent greenwashing and prompting firms to strengthen governance and risk management around sustainability-related claims and disclosures.

While the SDR’s ambitions remain more relevant and important than ever in the UK, the report points to some of its practical implementation challenges over the regime’s initial phase that may hold back its long-term success. This partly stems from “operational and interpretative hurdles” involved for asset managers in meeting the regime’s requirements. Many asset managers have, consequently, taken a “relatively cautious” approach to SDR implementation, with broader adoption of the sustainability labels relatively slow so far. The report identified challenges around “evidence expectations, resource intensity, and distributor engagement”, which the authors say have shaped asset management firms’ behaviour so far.

Beyond initial implementation, firms are preparing for the SDR’s upcoming disclosure requirements by drawing on existing reports and frameworks where possible. The report notes ongoing timing challenges and limited alignment with international regimes, with many firms highlighting the need for greater consistency between such regimes over time.

The authors set out a series of recommendations for asset managers to support effective implementation of the SDR, covering labelling, disclosure preparation, governance, and communication, and emphasise that, when applied well, the regime can deliver clear benefits to firms.

The report highlights ten key findings:

1. Whilst there have been challenges in finalising the language in disclosures updated for SDR, many asset management firms highlighted the benefits of revisiting their approach to fund communications and disclosure over the course of the applications process with the FCA. Many asset managers stressed the value of the consumer-facing disclosures (CFDs) for more clearly explaining a fund’s sustainability objectives and approach.
2. The majority of labelled funds fall within the “Sustainability Focus” category, with more limited uptake of the “Improver,” “Impact,” and “Mixed Goals” labels.
3. While the SDR was designed as a principles-based regime, many asset managers found the FCA’s review process more detailed and prescriptive than expected.
4. Linked to this, asset managers said the prescriptive nature of the regulator’s approach to the regime led their firms to commit significant time and resources to its implementation.
5. The SDR’s ‘naming and marketing’ rules have become a significant feature of the regime, with higher-than-expected use by firms and this category being viewed by some as a “de facto fifth label”.
6. Many firms had completed comprehensive firm-wide ‘anti-greenwashing’ reviews and made targeted enhancements to align with the new regulatory expectations. Despite initial challenges, most asset managers noted that they have been able to adapt effectively to the new rule.
7. Most firms are planning to take a pragmatic approach to the upcoming SDR disclosures by evolving previous reports, such as their entity and product level Taskforce on Climate-related Financial Disclosures (TCFD) reports.
8. A consistent theme (mirroring last year’s report) is a desire among market participants for greater international coherence in sustainability disclosures across different countries.
9. Asset managers observed a relatively limited appetite from distributors for labelled funds, yet firms thought distributor engagement would be important for the future market success of SDR labelling.
10. Firms also agreed that clarity from the FCA on the SDR’s trajectory, in particular its future extension to overseas funds, was as important as resolving near-term implementation challenges.

Commenting on the report, Oscar Warwick Thompson, Head of Policy and Regulatory Affairs at UKSIF, said:

“Our report shows that the FCA’s Sustainability Disclosure Requirements (SDR) has made good and tangible progress in a number of respects toward its intended objectives. The regime has particularly demonstrated its value in helping address greenwashing risks and enhancing transparency and comparability in the market for retail consumers.

“At the same time, this report shows there are clearly some challenges that the SDR needs to overcome to reach its full potential following its introduction nearly two years ago. The Financial Conduct Authority (FCA), alongside the industry and wider groups, have a key role to play in addressing some of the findings raised in this report.

“We remain committed to helping our members capture the full benefits of the SDR, which can give consumers further clarity to invest in line with their values and preferences on sustainability.”

Commenting on the report, David Croker, Partner at PwC UK, said:

“The SDR adds another layer of disclosure, but firms should see it as a strategic opportunity, not just a compliance exercise. While many are navigating data gaps and evolving guidance, the regime creates a chance to showcase credible management of sustainability risks and strengthen investment credentials.

“SDR challenges firms to better connect governance, product design and communication – done well, it builds trust and confidence, which are invaluable in a competitive market.”

This report, which was produced alongside UKSIF members, builds on the UKSIF and PwC UK SDR and Investment Label study published in May 2024.

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