The UK’s Financial Conduct Authority (FCA) implemented the Sustainability Disclosure Requirements (SDR) last year, setting up a framework that includes four sustainability labels for funds. Now, in a study that has attempted to predict what the UK sustainable funds market might look like by the end of this year, Morningstar has concluded that “the success of the FCA’s labelling regime will lie in the quantity and quality of the labelled products”.

Expected to come into force on 31 July this year, the SDR’s four labels include Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals. The report pointed out that the creation of a fourth label – Mixed Goals – in addition to the original three indicates that FCA “would like to see as many labelled products as possible”.

According to Morningstar’s research, at an optimistic estimate, “about 300 UK open- and close-ended funds will opt for a label by year-end”, representing eight percent of the funds domiciled in the UK and less than three percent of funds available for sale in the country. Over half of the labelled products are expected to be equity funds, while fixed-income and passive funds will likely be “significantly underrepresented”, each accounting for less than 10 percent of the labelled products.

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The report reasoned that some asset managers might find the requirements “too constraining”, while others might prefer a more cautious, “wait and see” approach. It emphasised that labels “can only be one indicator for investors” and should be “analysed in conjunction with other fund data and information”.