Putting a label on sustainability

Real estate fund managers are playing a waiting game, with a rapidly approaching deadline. The Sustainability Disclosure Requirements are an important step forward by the Financial Conduct Authority to “improve trust and transparency” for sustainable investment products. But with an approaching deadline for complying with the labelling requirements, the issue is coming into sharp focus for real estate fund managers. The SDR regime, applicable to UK asset managers managing UK-domiciled funds, has already begun, with anti-greenwashing rules in effect since 31 May 2024 that require sustainability-related claims to be “clear, fair and not misleading”. The next phase introduced a voluntary labelling system for products, available since 31 July 2024. These labels include: Sustainability focus: Assets must already meet a robust sustainability standard. Sustainability improvers: Assets should have the potential to enhance sustainability over time. Sustainability impact: Assets aim for a measurable positive impact. Sustainability mixed goals: Assets combine at least two of the other labels. The FCA has also established naming and marketing rules, set to take effect from 2 December 2024. These rules restrict the use of the terms “sustainable”, “sustainability”, “impact” or any variation of these terms in the fund name, unless it has adopted a label. For unlabelled products with at least one sustainability characteristic, other sustainability-related terms may be used in the fund name, but the firm must produce sustainability disclosure statements and explain why the product has not adopted a label. The fund must also be named appropriately to match its sustainability characteristics. A product can use sustainability-related terms in marketing and promotion but the firm must comply with the same disclosure rules required by labelled products. Implications For real estate fund managers, this means they need to review their current products and, depending on the sustainability language used in their fund names or marketing material, they may need to adopt a label, release disclosures or remove sustainability-related terms from their fund names and marketing. Impact Healthcare REIT is the sole real estate fund to have announced a name change, while funds from other sectors, such as Abrdn myFolio Sustainable and Premier Miton Global Renewables, are planning name changes or removing sustainability terms from their investment objectives. Research estimates that 1,213 UK funds will need to comply or change their name or marketing material. Limited participation to date Despite the regulatory push, the adoption of SDR labels has been slow. As of 14 October, only four asset managers have indicated they will label – WHEB Asset Management, Schroders and AEW UK will apply the “sustainability impact” label, while Jupiter will apply a “sustainability focus” label. This limited uptake can be attributed to several factors: stringent requirements such as detailed disclosures, challenges in navigating the labels, cost and resource constraints, the limited capacity of the FCA to approve labels creating a bottleneck, and the fact that many funds, such as pensions or overseas funds, are not within the scope of SDR. Adopting a wait-and-see approach Many fund managers are observing market trends and demand for labels before committing. There is limited investor demand for labels currently, hence being a first-mover with this relatively untried disclosure is considered a potential reputational risk. This also explains why the early movers are impact funds, where labelling reinforces their “impact” credentials and outweighs the perceived risks. However, this “wait-and-see” approach may lead to a rush in labelling and disclosures as deadlines near, with the FCA already reporting a “strong pipeline” of funds applying for labels. Despite initial low demand, this may grow as awareness of SDR increases. As with the Sustainable Finance Disclosure Regulation in the EU, where Article 8 has become a minimum requirement for many investors, a similar trend may develop with SDR labels in the UK market. Extended deadline The FCA has recognised the challenges faced by fund managers – “some firms… require more time to meet the higher standards” – and, as a result, has extended the deadline for the naming and marketing rules. Originally set to come into force on 2 December 2024, the FCA has granted an extension to 2 April 2025. The extension applies to funds that applied for an amended disclosure by 1 October 2024, use the terms “sustainable”, “sustainability” or “impact” in the fund name, and intend to either use an SDR label or change the name of their fund.  Next steps based on sustainability maturity Funds using “sustainable”, “sustainability”, or “impact” in their names or marketing that have not yet registered with the FCA, need to accelerate their engagement to comply by 2 December 2024. Based on client experience, completing a labelling readiness gap analysis and creating a draft disclosure typically takes five-to-six weeks, leaving a maximum of one week for FCA review, approval and investor response to any required amendments. For funds that include other sustainability-related terms in their name and/or marketing material, the path forward depends on their current sustainability maturity: a. First movers: Funds with advanced sustainability practices can label early, offering advantages like market differentiation and potential capture of sustainability-focused investors. b. The rest: Funds which are cautious to label their fund can: i. Produce disclosures for non-labelled products to meet FCA rules by 2 December. ii. Identify gaps in label requirements and develop a roadmap for compliance. iii. Create disclosures required to label the fund (without publishing) to prepare for future investor interest. Challenges and future opportunities Prompt action is crucial, given the time-consuming nature of compliance and an anticipated FCA bottleneck. While SDR disclosure is in its early stages, it is expected to gain prominence on investor priority lists as the deadline approaches. By acting now, funds can position themselves advantageously, potentially capturing new opportunities and mitigating risks in this evolving regulatory landscape. Iona Deacon is an associate and Conor O’Carroll is a senior sustainability consultant at JLL Image © Micheile Henderson/Unsplash