How wealth managers can prepare for SDR

How wealth managers can prepare for SDR

Last month, the UK Financial Conduct Authority announced that it intends to extend its Sustainability Disclosure Requirements (SDR) and investment labels regime to all forms of portfolio management services. ITL sat down with Shai Hill, Founder and CEO of Integrum ESG, to discuss what these new rules mean, how wealth managers can comply, and how their platform can help.

Integrum ESG is a specialist ESG ratings and analytics platform, providing exportable data, bespoke reporting solutions, and real-time controversy alerts. ITL has invested £100k in Integrum ESG and has a partnership agreement with the firm. 

How will wealth managers be impacted by the new rules?

Shai Hill (SH): Wealth managers will be in direct scope of SDR and will be held responsible even where the management of any assets is carried out by a third-party. If a wealth manager is making no sustainability claims for the services it provides, then it faces no new requirements, but it is of course forbidden from making any claims alluding to sustainability, ESG or positive impact.

If it wants to make sustainability claims, then it must apply to the FCA for one of four labels, depending on the sustainability objective of the managed portfolio.

Do wealth managers need to apply for one of these labels?

SH: If a wealth manager doesn’t want to apply for these labels but still wishes to claim its services have sustainability characteristics, it must produce the same types of disclosures as required for labelled products. It must also produce a statement clarifying why it does not have a label and cannot use sustainable, sustainability, impact or any variation of those terms in its communications.

Some may think they can sidestep these requirements by dropping any sustainability claims for their products and services. But these managers are likely to lose customers. The FCA themselves conducted a survey which revealed 80% of consumers want their investment to do some good, as well as provide a financial return. Which, in our opinion at Integrum ESG, means wealth managers might as well apply for one of these labels.

What do wealth managers need to do to comply?

SH: Wealth managers will be responsible for ensuring that the overall portfolio meets the sustainability claims of the portfolio. Disclosures must show that at least 70% of the portfolio is invested in accordance with the sustainability criteria.

The sustainable portfolio’s assets must be selected with reference to a “robust, evidence-based standard” that is an absolute measure of environmental and/or social sustainability. What these standards are and how they are applied must be disclosed to existing and prospective clients and their measurement must involve key performance indicators and/or metrics.

When will wealth managers need to comply?

SH: It is increasingly likely that wealth managers will have to comply with these rules by 2nd December 2024 – a very tight deadline for a demanding new set of requirements, but the FCA seems determined to give PWMs the same deadline as fund managers.

The FCA also seems unsympathetic that compliance with SDR will bring added costs to most even setting out cost estimates for PWMs – and noting that it intends to monitor a range of sources to ensure compliance.

Assuming most wealth managers will want to wait for publication of the final rules, they will need to begin their preparations in what is likely going to be a stressful Autumn 2024.

How can wealth managers best prepare for SDR?

SH: If they are looking to claim sustainability characteristics, they will need to bring more ESG know-how in house, and draft new pre-contractual disclosures. In terms of external input, they will need to move beyond headline ESG ratings and secure access to ESG data that gives them an understanding of the sustainability characteristics of a fund’s underlying assets. This ESG data will need to include KPIs for the assets that are absolute, not relative, and are exportable into client reports.

How can Integrum ESG help?

SH: Our platform gives clear reasoning for its ESG scores, with full visibility into the underlying data. It has been developed by investment professionals, for investment professionals, to solve the problems associated with opaque methodologies and provide complete clarity. As a result, wealth managers can understand and explain a company’s ESG challenges and how it manages those challenges in the market.

Integrum ESG can provide wealth managers with exactly what they need to escape regulatory scrutiny and comply with any investor demand thanks to our exportable granular data and bespoke reporting capabilities.

If you’d like to learn more about Integrum ESG’s offering, get in touch