Our thought leadership report on the FCA’s SDR regime- in collaboration with PwC UK- highlights a series of reflections on the experience of our asset manager members during SDR’s initial implementation phase, and sets out recommendations for our members to consider for effective implementation.

This covers labelling, disclosure preparation, governance, and communication, emphasising that, when applied well, the SDR regime can deliver clear benefits to firms. We have copied directly below some of the report’s main findings.

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Main findings

Our 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 SDR 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.

You can read the full report here.

This consumer guide, produced in partnership with Rathbones, as part of UKSIF’s annual Good Money Week, provides information on the new sustainable fund labels and how they work.

Please remember that this guide is not financial advice. It’s always best to speak to a financial adviser before making any investment decisions. A list of financial advisers that have signed up to UKSIF’s Financial Advisers’ and Wealth Managers’ Code of Conduct is available on our website here.

Read the full guide here. We hope you find this useful and informative.

Key takeaways for consumers include:

1. You don’t need to be an expert to start thinking about sustainable investment
2. Don’t be afraid to ask questions
3. Your views and values are unique
4. Remember no one label is ‘better’ or ‘worse’
5. The labels reflect a diverse range of approaches to sustainability

Systemic risks are un-diversifiable risks that can impact entire markets or economic systems through complex interconnections, potentially triggering chain reactions across multiple sectors and disrupting overall market growth.

Such risks include climate change, nature and biodiversity loss, income inequality, artificial intelligence, geopolitics and trade wars.

Systemic risks matter because:

– For diversified institutional investors with long time horizons, overall market growth (Beta) is the primary driver of investment returns

– Markets may misprice or not price systemic risks

– A complete interpretation of fiduciary duties includes responsibility for maintaining a well-functioning market

And so, UKSIF, in partnership with Scottish Widows and Canbury, are delighted to launch a new report responding to the growing recognition of the challenges systemic risks present to investors and the need for wider investment professionals, beyond stewardship teams, to consider them.

The report considers:

– Why systemic risks are particularly important for asset owners to consider

– How asset managers can tackle these risks despite operating within short-term performance horizons

– The practical steps UK-based asset owners can take to address systemic risks

By embedding systemic risk management as part of investment objectives and aligning teams, asset owners can enhance portfolio resilience.

The research is based on a qualitative analysis combining over 20 interviews, a roundtable discussion, and a literature review. The interviews and roundtable discussion covered key topics including defining systemic risk, challenges in addressing systemic risks, and the roles of different stakeholders. Participants included investment and stewardship experts representing a diversity of asset owners, asset managers, NGOs, consultants, and academia. The literature review examined four main areas: frameworks and background to systemic risk and systems-thinking, evidence of beta and its relationship to portfolio returns, market mis-valuation of systemic risks, and approaches investors are taking or could take to address systemic risks.

Read the full report here.

Read the press release here.

UKSIF’s thought leadership report, Unlocking UK pension capital for sustainable growth: Recommendations from UKSIF’s pensions review, outlines a series of recommendations on behalf of our UK asset owner network- and wider members- aimed at putting the UK’s pension assets to work more effectively in the wider economy to drive positive outcomes for pension savers, while also providing benefits for the environment and society which closely underpin long-term growth. Reflecting the long-term nature of pension savings and these policy discussions, a number of our review recommendations are deliberately longer-term and we hope can be considered both over the upcoming second stage of the UK’s pensions review and beyond this.

UKSIF’s review focuses on the following areas:

• Driving investment in the wider UK economy: the opportunities to leverage pension capital and unlock low-carbon investments: this chapter cautions against a ‘mandation’ policy approach towards UK pension schemes, while highlighting opportunities to mobilise higher levels of pension capital in the wider economy through greater policy and regulatory certainty, and seizing the opportunities presented by the transition.
• Promoting positive retirement outcomes and a more sustainable, resilient pensions system: this includes new positions for UKSIF on auto-enrolment reforms and related areas to this such as the gender pensions gap and pensions adequacy. We hope to see this dialogue emerge fully shortly in the next phase of the pensions review as we look to encourage a more sustainable and resilient pensions system.
• Ensuring more effective investment decision-making: supporting pension schemes’ role in the net-zero transition: this looks at evolving existing guidance for trustees and IGCs, clarification to fiduciary duty that directly recognises the FMLC’s landmark opinion from last year, and regulation of investment consultants.
• Building a well-designed, high quality sustainable finance regulatory architecture for pension schemes: this seeks to respond to concerns on the reporting burden for schemes, particularly smaller schemes, through recommending a new industry-led taskforce on sustainable finance rules. It highlights certain frameworks (e.g. ISSB standards and transition planning) that could form the basis of the future sustainable finance architecture for schemes (with relevance also for investors at large and non-financial companies).
• Promoting a more effective and competitive wider regulatory environment for pensions: this aims to provide a sustainability lens to upcoming reforms to the Value for Money Framework, DB surplus extraction proposals, and other areas such as pensions consolidation.

The UK economy is disproportionately exposed to stranded fossil fuel assets, with potential losses for UK pension savers reaching tens of billions of pounds by 2040, according to a new report from the UK Sustainable Investment and Finance Association (UKSIF) in collaboration with Transition Risk Exeter (Trex).

This analysis traces the complex web of financial ownership of fossil fuel assets and tracks the exposure of end beneficiaries – such as individual investors, pension funds and governments – to the risk of these assets becoming ‘stranded’. This refers to oil, gas and coal reserves, along with associated infrastructure and investments, that lose economic viability before their expected operational lifetimes as a result of climate policies, technological changes, or shifting market conditions.

Based on current green transition policies, mid-term action plans to cut emissions, and long-term net zero targets, the report finds that global economic exposure to fossil fuel asset stranding risk amounts to $2.28 trillion by 2040 – of which the UK’s exposure is calculated at $141 billion.  In comparison to the cost of climate inaction, this is still a much smaller loss to bear. In a warming scenario between 2.5°C and 2.9°C, climate-intensified natural disasters may lead to $12.5 trillion in economic losses by 2050.

Click here to read the full press release: UKSIF Stranded Fossil Fuel Assets Press Release

Click here to read the full report: UKSIF Stranded Assets Report

Read the report here

London UK., November 14, 2024 – As investors and international policy makers gather at COP29, The Global Sustainable Investment Alliance (GSIA) released its report Transforming Global Finance for Climate Action: Addressing Misaligned Incentives and Unlocking Opportunities. In addition to offering specific recommendations to the policymakers at COP29, the report identifies barriers to sustainable investment and the actions needed to encourage the flow of capital to the projects needed to address climate change.

Dubbed the ‘Finance COP’, COP 29 is expected to see a new climate finance goal dominate headlines, but GSIA have identified systemic misalignment keeping private investment and policy making out of step. National plans currently fall far short of what is needed, and significant private finance must be mobilized to avoid climate disaster. GSIA have set out a systems-change approach to aid the financing of that change, with academics from the University of Tokyo, Columbia University, London School of Economics, and investment professionals from World Bank Group, PRI, Berkeley Law and others contributing to the report’s findings.

“Investor and policymakers’ incentives are misaligned,” said James Alexander, CEO of UKSIF and Chair of GSIA. “At COP 29, policymakers, investors and civil society negotiators can help address the key barriers to meaningful and actionable change. We need supportive policy action to align incentives and catalyse capital to unlock the opportunities that a climate transition presents.”

The report groups incentive barriers into five categories, which GSIA has called the PIVOT framework:

• Policy vacuum – Policies can act as barriers that prevent investment from flowing to the climate crisis. At the same time, there is a lack of positive policies that encourage climate-positive investments.
• Interest – Companies and investors may focus on quick wins for near-term financial return or sustainability, ignoring long-term goals (e.g. net-zero by 2050). This short-term thinking prevents investments in sustainable projects and innovations to meet climate targets.
• Valuation – Environmental and social factors are traditionally not accounted for in financial models causing money to flow into environmentally harmful industries as “hidden costs” aren’t considered. A short-term focus on financial reporting can further undermine long-term value creation.
• Ownership – Some institutions and investments are managed without active involvement. A hands-off approach, whether due to cultural or structural challenges, means redirecting capital is difficult, and met with resistance from the current system.
• Transition misalignment – Certain business models and industries naturally conflict with the goals of the energy transition, making it challenging to create and put into action long-term plans that include these sectors.

Read the press release here

Read the report here

About Global Sustainable Investment Alliance (GSIA)

GSIA is a global collaboration of sustainable investment membership-based organisations, aiming to unlock the power of the worldwide financial services industry to drive leadership, achieve a substantial impact on key global challenges, and accelerate the transition to a sustainable future.

GSIA simultaneously works to enhance the synergies between members, participate in global initiatives, and provide advice and support to local and regional sustainable investment organisations as they establish and grow.

GSIA’s members are drawn from Europe, Asia-Pacific and North America. Collectively GSIA’s members represent the mainstream of global finance and investment, managing tens of trillions of dollars in assets. GSIA members include Eurosif (European Sustainable Investment Forum), Japan SIF (Japan Sustainable Investment Forum), RIAA (Responsible Investment Association Australasia), RIA Canada (Responsible Investment Association Canada), UKSIF (UK Sustainable Investment and Finance Association), US SIF (The US Sustainable Investment Forum).

About UKSIF

The UK Sustainable Investment and Finance Association (UKSIF) is the member organisation for sustainable investment in the UK, with over 320 members collectively managing £19tn in global assets. Members include investment managers, pension funds, banks, financial advisers, research providers, NGOs, among others.

How To Talk To Your Clients About Sustainability

[Thursday 17th October 2024] UKSIF has today released a member guide called ‘How to Talk to Your Clients About Sustainability’ which aims to share the results of research done into public understanding of various terms around sustainable investing. The guide aims to respond to the frequently encountered challenge of low end-investor awareness of the options available and the meaning of industry terms like ESG, Responsible Investing, and Impact Investing.

‘How to Talk to Your Clients About Sustainability’ sets out the case for a renewed public and client-education drive to better inform savers of the sustainable savings and pensions options available to them so that they can make informed choices. The guide provides an overview of extensive polling conducted by UKSIF in 2024 to gauge the sentiments of pensions and savings-holders in the UK towards the principles of sustainable investing. It also aims to recognise the politicised context that sustainability has come to exist in and to recommend ways for members to articulate the financial materiality of long-term considerations that might affect the performance of their portfolios like nature loss, labour laws, and climate change.

Finally, the guide provides recommendations designed to assist firms in developing their client-facing messaging on sustainability, and sets out plainly the public appetite for information on the sustainability credentials of pensions and savings options.

Alongside PwC, we have released our report on implementing the FCA’s Sustainability Disclosure Requirements (SDR) and investment labels rules (the ‘SDR package’). The report identifies implementation challenges that firms are facing, provides recommendations on how to address those challenges, and sets out an implementation roadmap to support asset managers and other firms in implementing the new rules.

UKSIF and PwC collaborated alongside our members, including representatives from our SDR Implementation Working Group, to offer asset management firms initial insights and recommendations for action as they implement various elements of the SDR package of regulation over this year. Challenges identified include fund labelling interoperability across different jurisdictions; uncertainty over the qualifying criteria and standards for the labelling categories; product governance challenges, and tight timelines for compliance with the ‘anti-greenwashing’ rule. The report sets out 10 recommendations for firms on responding to the challenges posed by the new regulation.

In brief, they are:

1. Carefully consider what label, if any, to apply to products under the SDR, taking into account any commercial benefits as well as client and stakeholder expectations and perceptions around labelled and unlabelled products.
2. Focus on demonstrating compliance with the 70% threshold for sustainable-labelled funds.
3. Establish a firm-wide product classification framework to manage the complexity within the SDR package as well as the international fragmentation of regulatory approaches.
4. Step up engagement with distributors at the earliest opportunity to ensure those distributors are comfortable with the core sustainability features of each product, the application of any labels, and any restrictions around non-labelled funds being offered.
5. Perform a broad, firm-wide greenwashing review to support compliance with the ‘anti-greenwashing’ rule.
6. Develop a taxonomy of terms that is applied internally to identify potential greenwashing and prevent it in the future.
7. Focus sustainability reporting on what is most relevant and material to your business and clients.
8. Streamline data collection and leverage existing reporting processes to avoid duplication and drive efficiencies.
9. Align reporting cycles with TCFD reporting where possible.
10. Adopt a strategic, long-term approach to reporting that creates value for your organisation.

UKSIF’s key recommendations to establish the UK as the world leader in sustainable finance

UKSIF’s key recommendations to drive private capital into sustainable transport