Login to your account
Fund selectors, discretionary fund managers, model portfolio service (MPS) and fund of funds (FoF) providers are struggling to comply with the upcoming Sustainability Disclosure Requirements (SDR), research by MainStreet Partners has found.
According to the ESG data provider, fund selectors are “considering walking away from the labels” due to the scale and costs required to comply with the regulation.
One of the biggest challenges has been the need for asset managers to document and evidence in detail their investment policies, according to the firm’s managing director Neill Blanks.
“No one is finding it plain sailing,” he said, as many asset managers will be forced to hire independent advisers and/or increase their resources to deal with the specificity of the SDR rules and labelling requirements, alongside the anti-greenwashing provisions that came into force at the end of May.
Blanks argued there was a general sentiment that SDR might have followed a similar path to the EU’s SFDR, but noted the Financial Conduct Authority’s approach to sustainability and greenwashing has been “far more demanding”, especially because SFDR was never intended to be a labelling regime.
More specifically, MainStreet Partners found there are areas of the investment management industry that are going to need “particular help” to fully comply with SDR and its related labels, given less specific guidance was provided to them.
Fund selectors, discretionary fund managers, MPS and FoF providers specifically may be in need of more assistance due to a lack of clarity, according to MainStreet.
This is because they have been encouraged by the FCA to treat each underlying fund as an asset and, as such, they will need to establish an asset-specific, robust, absolute measure of sustainability for each of their funds, the data provider explained.
This means that FoF providers will require an absolute measure of sustainability for each fund they hold in order to apply for an SDR label. MainStreet Partners noted that the more complex reality of SDR is “very different” to the idea fund of funds managers had, where there was an understanding that they could rely on the labels acquired by the underlying funds to be able to attain one themselves.
As a result, a key part of the SDR compliance process will focus on the due diligence needed to identify appropriate sustainability elements for a fund of funds to use across each underlying asset and fund, MainStreet said.
But even if they do not wish to apply for a label, FoFs will still need to abide by the anti-greenwashing and marketing rules, it added.
According to Jacob Kasaska, research associate at MainStreet Partners, asset managers appreciate the robustness of SDR, how difficult it is to obtain a label and its aim to protect consumers from harms arising from greenwashing. However, this does not come without obstacles.
“Some fund selectors and FoF providers are telling us they are considering walking away from the labels because they do not have the scale to absorb the costs necessary for SDR compliance, which could lead to consolidation,” he highlighted.
“Family offices are another area of the market left to their own devices, without the necessary cost-efficient tools to help them, despite some welcoming the rules and wanting to transition to this new compliance regime.”
Most of the issues are being found within product manufacturers and providers, Kasaska said, especially those most used by retail clients and financial advisers, such as pooled investment vehicles.
“This is a key problem for a set of regulations that are intended to benefit retail consumers,” he added. “We eagerly await the outcome of the FCA consultation on MPS that concludes on the 14 June to see if there is any more clarity as to how fund buyers are expected to treat their ‘assets’ and attain a label.”
Published by Investment Week
Share
