ESG investing: SDR helps cut through the ‘greenwash’ fog

Andrea Acimovic explores the UK FCA SDR rules for funds and how they could be applied to Managed Portfolio Services offered by investment managers.

With so many “green labels” around, funds and MPS providers are at risk of greenwashing.  What is the solution?

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By Andrea Acimovic, ESG Specialist, Elston Consulting

While the world of ESG (environmental, social and governance) investing is long past being considered a brave new frontier, it is still somewhat of a Wild West in terms of the lack of a meaningful regulatory framework around either labelling and terminology, or indeed the actual ESG impact of a particular investment product. Headway has been made with the launch of the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR). These rules oblige a business to provide clear and accurate information as to the sustainability of their investment offerings, and indeed the term ‘sustainable’ can no longer be used in the name of a product that is not SDR-labelled.

The problem with labelling

​In spite of an abundance of well-meaning sounding descriptions: ethical, responsible, SRI, impact, for example; until recently, it turned out that very few funds purporting to be ESG were actually aligned with the SDR. That raised a red flag for us. If we, as professionals, were struggling to make sense of the labels, how could advisers and clients be expected to navigate this space with confidence? It is possible for investment products to have a name that makes them sound like they are having some sort of positive impact when in fact this is far from the case. Data providers themselves can struggle to understand the distinctions while others purposefully misuse them, all of which leads to confusion and a lack of trust.  

Using SDR to Bring Clarity

​From our perspective as an MPS provider, it mattered hugely that we found some way to bring clarity and consistency, helping advisers and clients to see what is genuinely sustainable as opposed to what is simply marketed as such. The SDR framework gave us a starting point. It provides a structure for categorising funds based on their sustainability objectives. There are four labels: Sustainable Focus, for funds already meeting high environmental and social standards; Sustainable Improvers, for those on a credible path to improvement; Sustainable Impact, for funds aiming to generate measurable positive change; and Sustainable Mixed Goals, for blended strategies that still maintain high standards. The framework is rigorous—only about 100 funds have received an SDR label out of thousands claiming ESG credentials. And advisers will play a crucial role in the adoption of these funds.

The Adviser’s Role in ESG

Just as you assess a client’s risk tolerance, so it follows that you should also take time to assess their sustainability preferences. If a client has no ESG preference, they can go into a standard portfolio, but ESG risk monitoring should still be part of the process. We actually see ESG assessment as a risk tool, and ESG considerations should really be embedded in every portfolio, regardless of preference.
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If a client has a high ESG priority, then they should be in a sustainable portfolio. And that’s where due diligence becomes essential. We need to ask: does this portfolio deliver what it promises? Are its objectives aligned with the SDR regime? What percentage of its holdings are actually SDR-compliant? Too often, we’ve seen portfolios labelled as ethical or green that are filled with standard funds. That’s not good enough.

Launching the Elston Sustainable MPS

It is for this reason that we created the Elston Sustainable MPS. A suite of five risk-profiled portfolios—20, 40, 60, 80, and 100% equity—built entirely with SDR-compliant funds. It is an industry first, and we’re proud of that. Although SDR regulation for MPS hasn’t been finalised – at present it just applies to funds and other collective investment schemes - it makes sense to us to lead with best practice.

We monitor these portfolios quarterly to ensure ongoing SDR compliance. We also provide suitability templates and ESG advice processes to support our advisers. The idea for a fully SDR-compliant MPS was not just borne of our own frustration with inconsistency in the marketplace, but also our advisors’. They were noticing just how many regular products there could be in portfolios carrying the ESG label.
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These 100% SDR portfolios are especially valuable for “deep green” clients—those who want genuine sustainability, not just a label. They’re a small segment, perhaps up to a maximum of 4% of clients, but they deserve a solution that matches their values. If someone wants a deep green portfolio, they should be given the real thing—fully SDR-compliant, rigorously constructed and transparently managed.

Doing what’s right, now

​Ultimately, we are not waiting for the rules to be written. We are building what we believe the future should look like. And we are doing it now, because it’s the right thing to do—for advisers, for clients, and for the integrity of sustainable investing.