Nearly half of UK sustainable funds affected by the Financial Conduct Authority’s (FCA) Sustainable Disclosure Requirements (SDR) naming rules are expected to be ETFs, according to research by FE fundinfo.
The study reveals that among the 1,213 UK funds using sustainability-related terms in their names, a notable 48% are ETFs. The new rules mandate that funds with “ESG” or “sustainable” in their names must allocate at least 70% of their assets to sustainable investments.
These regulations, which were supposed to come in effect on December 2, following their announcement in May. Meanwhile, FCA on Monday announced that firms are being offered temporary flexibility to comply with ‘naming and marketing’ rules under the SDR regime until 2 April 2025.
Matthias Breier, head of ESG products at FE fundinfo said, “We are likely to see some movement in the ESG market over the coming months, as some firms will have to rebrand or reposition their funds if they cannot comply in time. Everything needs to be wrapped up in early October to ensure investors receive all the necessary disclosures in the required 60-day window.”
Passive funds in the UK are expected to be “significantly underrepresented” under the SDR, with an anticipated 7% of funds expected to receive labeling. Since many ETFs are registered abroad, they are not currently included in the scope of these rules.
In February, the UK government began consultations on extending the SDR’s scope to include overseas funds.
The proportion of ETFs in the UK’s ESG fund universe affected by the rules is higher compared to that in the EU. According to Morningstar Sustainalytics, of the 1,600 EU ESG funds impacted by the new rules, only 21% (354) are ETFs and index funds, though they represent nearly half (45%) of the $40 billion worth of stocks impacted by the exclusion rules.
The FCA has announced that firms need to take all reasonable steps to comply with the new ‘naming and marketing’ and disclosure rules, effective from December 2, 2024. The FCA noted recent progress and a strong pipeline of fund applications but acknowledged that some firms need additional time to meet the new standards and prepare necessary disclosures.
To address this, the FCA is offering limited flexibility until 5 p.m. on 2 April 2025, for firms to comply with the naming and marketing rules for sustainability products. This extension applies only if a firm has submitted a completed application for amended disclosures by October 1, 2024, and is using terms like ‘sustainable,’ ‘sustainability,’ or ‘impact’ in their fund names.
Firms are encouraged to comply with the rules as soon as possible and not to rely solely on this extension. They must continue to follow all other relevant regulations, including the anti-greenwashing rule. The temporary measures do not apply to funds with other sustainability-related terms not specified above.
The new naming rules align with pre-SDR guiding principles, which require that fund names reflect substantive and material ESG or sustainability characteristics. For funds marketed with sustainability-related terms but lacking a label, at least 70% of their assets should have sustainability characteristics.