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Breaking down SDR

15 Dec, 2023 | Return|

After a considerable consultation period, of which Square Mile was a participant, the FCA finally released its highly awaited Policy Statement PS23/16, Sustainability Disclosure Requirements (SDR) and investment labels, on 28th November 2023. The updated regime remains focused on informing and protecting consumers and improving trust in the market for sustainable investments. Underpinning this is the reduction in ‘greenwashing,’ this is where fund managers or other FCA authorised firms overstate or misrepresent claims they make in respect to the sustainability credentials of the fund products they manufacture and promote.

Key to this is a labelling regime for UK-based funds which are distributed to investors with an overt sustainability objective. The labels will allow advisers and investors to readily identify the sustainable characteristics that a fund has. Currently the regime will not apply to offshore funds that are registered for sale in the UK, however the FCA are working on an equivalency here. ‘Ethical Funds’ will also be in scope if they have a stated positive social or environmental outcome in their objective.

Whilst the SDR will largely affect fund managers and fund distributers, such as platforms, it does also have touch points for any FCA authorised firm which make sustainability-related claims about their products and services. This could include financial planning groups. Currently, firms offering portfolio management services are out of scope, however the likelihood is that these will be brought under the scheme once a further consultation has been undertaken in early 2024. Therefore, financial advisers who offer sustainable portfolios within their CIP, for example, should take the time to become familiar with the initiative.

Furthermore, the SDR draws in aspects of Consumer Duty’s “consumer understanding” outcome – whereby FCA authorised firms (in respect to the delivery of sustainability-related products) are required to act in good faith, avoid causing foreseeable harm and enabling retail customers to pursue their financial objectives. This is another touch point advisers should be aware of.

In summary, the SDR regime now includes:

  • An anti-greenwashing rule for all FCA authorised firms to ensure that sustainability related claims are ‘fair, clear, and not misleading’

  • Four investment labels (outlined below)

  • New rules and guidance for firms marketing investment funds using sustainability characteristics


The most notable change was the introduction of a fourth new label, “sustainability mixed goals”. The chosen labels are outlined below:

1. Sustainability focus: For products investing mainly in assets that are sustainable for people and/or the planet.

To be eligible, firms will now need to establish a standard that aligns with their products’ sustainability objectives and select assets that meet the standard - based on a methodology or approach that is determined by industry practice, an authoritative body, or proprietary standards. It is not necessary to have an independent assessment on a credible standard run by a third party.

2. Sustainability improvers: For products with a sustainability objective which is consistent with an aim to invest in assets that have the potential to improve environmental and/or social sustainability over time.

The main change here was the requirement to meet a robust, evidence-based measure for an asset to be deemed as improving its environmental or social sustainability over time. Firms must also develop short and medium-term targets for improvements. These have to be consistent with the investment horizon of the product.

3. Sustainability impact: For products aiming to achieve a pre-defined positive, measurable impact in relation to an environmental and/or social outcome.

Here, the FCA removed its initial reference to ‘real-world’ impact throughout the criteria for this label. Furthermore, the FCA has added that a product can be eligible even if no new capital is invested, but the product’s assets still contribute to a positive impact.

4. Sustainability mixed goals - the new label: For products with a sustainability objective to invest at least 70% in accordance with a combination of the sustainability objectives for the other labels.

Firms must identify, and disclose, the proportion of assets invested in accordance with any combination of the other labels. However, requirements for each of the other labels must be met.


The FCA’s rules and guidance will come into force on these dates:

  • 28th November 2023: Publication of guidance.

  • 31st May 2024: Anti-greenwashing rule and guidance comes into force.

  • 31st July 2024: Firms can begin to use labels, with accompanying disclosures.

  • 2nd December 2024: Naming and marketing rules come into force, with accompanying disclosures.

  • 2nd December 2025: Ongoing product-level and entity-level disclosures for firms with AUM greater than £50bn.

  • 2nd December 2026: Entity-level disclosure rules extended to firms with AUM less than £5bn.

The new framework will undoubtedly have many ramifications on the investment industry, demanding compliance efforts that will take time - a challenge Square Mile is fully equipped to support you through.

Square Mile believes the SDR is a positive regulatory initiative, and we are pleased to see that the FCA has taken the time to respond to some of the concerns and suggestions that the industry raised in the consultation period. SDR should help to reduce confusion for financial advisers and end investors when trying to identify suitable sustainable investments. It should improve consumer outcomes and better align them to expectations, and it should improve the reputation of fund managers and distributers in the marketplace.

If they have not already, financial advisers should begin to familiarise themselves with this regulation especially since obligations under the Consumer Duty are included. Square Mile will continue to monitor the implementation of this regime and highlight any key developments that arise during the implementation timeline.

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