Enthusiasm for the sustainability disclosure requirements (SDR) labels has declined over the past six months, according to Morningstar. This shift comes just three weeks before firms are required to start using the labels as mandated by the Financial Conduct Authority’s (FCA’s) SDR.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, noted that initial excitement about the UK’s sustainability labels stemmed partly from dissatisfaction with the European Union’s Sustainable Finance Disclosure Regulation (SFDR). However, this enthusiasm has waned recently.
Bioy explained that asset managers have found the criteria for obtaining a label to be more stringent than expected and have realized that initial demand for labelled products might not be as high as anticipated. As a result, many asset managers are adopting a wait-and-see approach.
Another factor reducing enthusiasm is that many funds marketed in the UK are not within the scope of the new regulations, according to Bioy. Consequently, the number of labelled products is expected to be smaller than the universe of unlabelled funds with sustainability disclosures.
Morningstar predicts that the universe of unlabelled funds with sustainability disclosures will surpass that of labelled funds. The firm views this as an unintended consequence of the regulation. However, it aligns with the FCA’s goal to combat greenwashing and improve transparency, contrasting with the SFDR’s broader objective of directing capital toward sustainable activities.