Fund selectors, the regulator has been and has finally given some clarity on sustainable label requirements for portfolios.

The FCA announced this morning that portfolios will - from December - be required to meet new sustainability labelling requirements, though a question mark remains over bespoke offerings. 

From the horse’s mouth: 

“We are proposing to extend the SDR and labelling regime to portfolio management services provided to clients on a discretionary (and/or advisory in relation to private markets) basis, including where the portfolio management offerings are model portfolios, customised portfolios and/or bespoke portfolio management services,” the FCA wrote. 

Among other criteria, portfolio management offerings will be able to use a label if at least 70 per cent of its underlying components are invested in assets deemed ‘sustainable’. 

It’s worth noting that at this stage it’s only a consultation, so any unhappy wealth managers have until June 14 to voice their concerns before the fine print is ironed out.

The four labels are as follows:

• Sustainability Improvers, which should aim to invest in assets that have the potential to improve environmental and/or social sustainability over time
• Sustainability Focus, which should aim to invest in assets that are environmentally and/or socially sustainable
• Sustainability Impact, which should aim to achieve a pre-defined, positive, measurable impact in relation to an environmental and/or social outcome
• Sustainability Mixed Goals, which should invest at least 70 per cent in line with a combination of the sustainability objectives for the other label

How has this been received by the industry? 

Well, data we've been kindly given by Nextwealth suggests just 17 per cent of new money goes into portfolios with an ESG bent.

Despite this, more than 80 per cent of DFMs offer an ESG range, with many feeling it is necessary to offer one just to get onto adviser panels despite the small quantity of assets involved.

Indeed Heather Hopkins of NextWealth suggested to us that most portfolio managers would comply with the rules rather than leave the ESG sector because they are the cost of doing business.

Nonetheless team at Quilter are satisfied, it seems, with Gemma Woodward, head of responsible investment on their Quilter Cheviot arm, saying the move is the ‘next logical step’. 

“Having consistency across the investment landscape is going to be critical if the SDR labels are to be a success and that customers are not misled on the sustainable credentials of their portfolios,” she said.

“Portfolio management services, be that model portfolios or bespoke offerings, have become increasingly popular in the last decade. While the burden will now increase on those providers, it is important consumers and advisers can accurately compare services and that there is a level playing field for sustainable offerings – this will be particularly interesting for bespoke offerings which should reflect the customer’s requirements.” 

Hoshang Daroga, investment director at Elston Consulting, said: “The proposed extension of the SDR to model portfolio service providers is good news. These naming conventions are very positive and I think they will go a long way to preventing ‘greenwashing’.

"They put the onus on providers to ensure that the sustainable-badged funds in their model portfolios – and the models themselves – are clearly labelled and accurately described.

"The rules will help to ensure that firms are offering genuinely sustainable funds as part of their portfolios. It’s heartening to see the FCA moving so quickly to get these rules out, considering it only began consulting on the draft rules in October 2022.”

“It's also really refreshing to see that the FCA is actually considering the MPS market as well as the funds market when it comes to retail products.”

“SDR compliance is an additional layer of product governance on funds and MPS that advisers will need to consider”.

Once again, overseas offerings are excluded from the rule, and in February Asset Allocator covered the ambiguity surrounding ETFs in portfolios, which are typically domiciled in Luxembourg or Ireland. 

When consultation eventually gives way to legislation, we’ll be the first to let you know but, until then, portfolio managers can hold off labelling for a little while longer.