Less than half of the sustainable passive funds domiciled in the UK are likely to opt for a Sustainability Disclosure Requirements (SDR) product label this year, according to a research paper – UK SDR Through the Looking Glass, published by Morningstar.
The report identified 410 UK-domiciled funds that have sustainability-themed names – including the words climate, diversity or renewable, for example – and then estimated how likely they are to use the regime.
Morningstar stated 300 of the 410 funds are likely to opt for a label,representing 8% of the funds domiciled in the UK and less than 3% of funds available for sale in the country.
Over half of the labelled products are expected to be equity funds, while fixed-income and passive funds will likely be “significantly underrepresented”, each accounting for less than 10 percent of the labelled products.
The report reasoned that some asset managers might find the requirements “too constraining”, while others might prefer a more cautious, “wait and see” approach. It emphasised that labels “can only be one indicator for investors” and should be “analysed in conjunction with other fund data and information”.
Thr Financial Conduct Authority unveiled the final rules for SDR in late November, adding a fourth label – sustainability mixed goals – to sit alongside its sustainability focus, ‘sustainability improvers’ and ‘sustainability impact categories.
The regulator estimated that around 280 funds that currently have key sustainability-related terms in their name or objectives will use a sustainability label.
Neither the FCA or Morningstar take into account new funds that will be launched this year and may opt for a label.
Morninstar predicted the focus label will be the dominant one, accounting for almost half of labelled products. T
his is because asset managers have the best understanding of the strategy and it is most aligned with the European Union’s Sustainable Finance Disclosure Regulation (SFDR). This is despte questions about what constitutes a “robust and evidenced-based standard”.
It expects mixed goals to come in second on 31% followed by improvers, 12% and impact,, 11%.
The firm notes that “most passive funds available for sale in the UK (1,960 in total) are overseas exchange-traded funds, typically domiciled in Ireland or Luxembourg, which are currently out of scope.
The limited number of labelled passive funds will reduce the choice offered to sustainability-oriented investors in the UK.”
However, the firm believes there should be more options in the labelled allocation funds space thanks to the introduction of the mixed goals tag.
The labelling regime begins from 31 July 2024 while the naming and marketing rule comes into force on 2 December 2024. This is when asset managers will consider investor demand, competitive pressure and the benefit of clarity as reasons for using the labels, Morningstar said.
“The success of the UK labelling regime will lie in the quantity and quality of the products that get labelled,” said Hortense Bioy, global director of sustainability research at Morningstar.
She added, “We expect conversations in the next few months and the first wave of implementation later this year to determine how this market will shape up.
We hope this early analysis will contribute positively to these conversations for the benefit of investors not only in the UK but also other jurisdictions as they look to implement similar regulatory frameworks”.
©Markets Media Europe 2024
