The impending Sustainability Disclosure Requirements (SDR) in the UK provide an opportunity for fund managers to accelerate their net zero goals, writes Melville Rodrigues of Apex Group
'In January, the UK’s Financial Conduct Authority (FCA) closed its latest round of consultation on the Sustainability Disclosure Requirements (SDR), a UK alternative to the EU’s SFDR, initially proposed in October 2022.
The SDR proposals are intended to combat greenwashing across multiple asset classes and to improve the level, consistency and clarity of sustainability information available to investors. While initially targeted at the retail investor market, institutional investors and the real estate industry also have the option to use the sustainable investment labels set out by the SDR for products being marketed to institutional investors.
SFDR vs SDR, what’s the difference?
The key point of difference between the SFDR and the SDR, is that the latter introduces a dedicated ESG labelling system, with three categories: Sustainable Impact, Sustainable Focus and Sustainable Improvers.
By contrast, the European Securities and Markets Authority (ESMA), the EU supervisory authority that focuses on SFDR, has clarified that it considers the SFDR to be a disclosure framework rather than an ESG labelling system. However, despite this clarification, the market has jumped on the SFDR Article 8 and 9 guidelines and looked to use them as product labels.
The FCA has signalled to the market that it did consider the SFDR closely when drawing up its own proposals for enhanced climate-related disclosures. The regulator has also confirmed that it has sought, as far as possible, to achieve international coherence and consistency with other disclosure regimes - notably the SFDR in the EU and other proposals set out by the SEC in the US.
What does this mean for real estate investors? The SDR labels outlined above are accompanied by disclosure requirements and restrictions on the use of sustainability-related terms in investment product naming and marketing.
Where sustainability-related features are integral to an investment policy and strategy, but the manager chooses not to use a label or is unable to do so because the product does not satisfy the criteria, the manager will need to ensure those features are communicated in a proportionate way to the sustainability profile of the product.
In practice, this may often mean that the manager will not be able to use ESG-related terms in the relevant name and marketing. Some institutional fund managers investing in real estate may argue that the SDR label system is yet another additional regulatory burden that they would ignore, and duplicates much of the attention and resources managers operating in the EU are dedicating to meeting the EU’s SFDR requirements.
What is the upside? There are compelling arguments being made for UK asset managers to adopt the labels voluntarily, the most compelling of these being that SDR provides credible labels for funds looking to market themselves as having sustainability objectives.
More broadly, across other asset classes, we are seeing UK managers seeking to ‘get ahead’ of the future introduction of legislation, by aligning themselves with ESG best practice, despite there being no current regulatory obligation to do so. It may also be the case that institutional investors, whether in the UK or elsewhere, can see the merits of the SDR labels for their own fund commitments.
While rigorous, the FCA’s guidelines provide sufficient flexibility to accommodate different sustainability objectives and as such, lends itself to institutional investors in real estate to adopt SDR labels criteria as benchmarks for assessing sustainable investment opportunities.
Importantly for real estate fund managers, the proposed ‘sustainable-improvers’ label offers an opportunity to attract capital flows to accelerate net-zero goals. This label in particular will be attractive for funds that wish to invest in assets that are stranded or currently unsustainable, but where there is a medium-term objective of improving sustainability characteristics over time.
What next? Those in the real estate industry adopting SDR principles are positioning themselves at the forefront of the move towards clear sustainability labelling – both across asset classes in the UK, and also internationally, as other regulators begin to take action.
UK real estate investors must prepare - the ESG regulatory paradigm shows no signs of shifting, with ever more stringent anti-greenwashing regulatory measures here to stay. My advice to UK managers? Seize the opportunity to get ahead of the pack by understanding the opportunities presented by SDR product labels.'
Melville Rodrigues is head of real estate advisory at global financial services provider Apex Group
*This article appears in the March 2023 issue of PropertyEU within a special report on ESG
