SDR rules leave ETFs in ‘limbo’, asset managers warn

Due to a lack of clarity on the Overseas Fund Regime

Theo Andrew

City of London UK

The recently published Sustainable Disclosure Regulation (SDR) has left ETFs in “limbo” due to a lack of clarity on whether it will apply to overseas funds, ETF issuers have warned.

Overseas funds marketed in the UK – such as those domiciled in Ireland and Luxembourg – were left out of scope in the Financial Conduct Authority’s (FCA) new rules, published 28 November, creating uncertainty for the European ETF market.

The Overseas Fund Regime (OFR) is planned to be introduced in April 2024 and is set to remove a key post-Brexit barrier for EU-domiciled ETFs entering the UK.

However, Invesco noted that while SDR has delivered clarity for UK funds, it was not the case for its overseas funds domiciled on the continent.

“The FCA’s final rules provide welcome clarity on the sustainability classification and labelling system for UK funds. However, ETFs remain in limbo until a decision is taken on extending the SDRs regime to overseas funds,” an Invesco spokesperson said.

“In the meantime, we urge the UK and EU authorities to work towards greater coherence and interoperability between SDR and any future revamp of the EU’s Sustainable Finance Disclosure Regulation (SFDR) including the introduction of a new EU fund labelling regime.”

Earlier this week, the FCA launched a consultation on its OFR and how products should be recognised under a post-Brexit framework. It highlighted how ETFs’ different distribution methods versus other fund types will be considered during the process.

However, Adrian Whelen, head of market intelligence at Brown Brothers Harriman, said elements of the OFR criteria – such as ESG and value assessments – remain unclear and are set to be determined by the UK Treasury.

It comes as UK fund selectors have warned they could face difficulties holding UCITS ETFs unless the new Sustainable Finance Disclosure Regime (SFDR) adopts the same labels as the FCA.

The European Commission’s consultation on revamping SFDR is set to conclude later this month, with many leading industry voices hoping the current framework will be scrapped.

Despite this, asset managers are broadly positive about the FCA's new labelling regime.

Legal & General Investment Management (LGIM) said in a statement: “Increasing clarity and trust to deliver better client outcomes in the responsible investment market is an important goal and we see yesterday’s announcement by the FCA setting out its SDR regime as a step to achieving that.

“We look forward to working with the FCA and the wider UK investment industry as we take the time to consider the policy implications in detail.” 

As part of the new rules, the FCA unveiled a fourth category – Sustainability Mixed Goals – to sit alongside the three other labels, ‘Improvers’, ‘Focus’ and ‘Impact’.

Labelled funds will be required to have a minimum of 70% of assets that align with the fund’s sustainability objective, down from proposals of 100% published earlier this year.

BlackRock, Fidelity, State Street Global Advisors, Franklin Templeton and JP Morgan Asset Management declined to comment on the FCA’s new regulation.

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