Sustainability Disclosure Requirements labels: good and poor practice

Find examples of good and poor practice for using labels under the Sustainability Disclosure Requirements (SDR) regime.

Firms have been able to use sustainability labels under the SDR regime since July 2024.

The labelling part of the regime seeks to improve transparency and equip consumers with information to navigate the market.

While implementing sustainability labelling, we’ve found examples of good and poor practice disclosures.

We’ve set these out below for each of the 4 labels.

These examples are intended to help firms prepare pre-contractual disclosures for use of labels, following the pre-contractual disclosure examples[1] we published previously.

1. Who this applies to

This will be of interest to firms in scope of SDR that wish to adopt labels for authorised and unauthorised funds.

This does not cover pre-contractual disclosures for unlabelled funds in scope of our naming and marketing rules.

2. Relevant rules and guidance

These examples refer to:

The criteria for use of labels in our Environmental, Social and Governance sourcebook[2] (ESG) 4.2.
The pre-contractual disclosure rules in ESG 5.3 (as they apply to labelled funds).
The anti-greenwashing rule and non-handbook guidance (FG24/3[3]).
Annex 2 of the SDR Policy Statement (PS23/16[4]), summarising the regime.

3. What we looked at

The findings and examples below are based on what we have seen through the fund authorisations process for updating pre-contractual disclosures. They were also informed by our engagement with industry stakeholders.

4. Background

The SDR regime aims to reduce greenwashing, help consumers navigate the market and give them information to decide which funds (labelled or non-labelled) meet their needs and preferences.

It is a principles-based regime that requires firms to substantiate their sustainability claims.

It is designed to support evolution and innovation, within clear guardrails.

We will continue to engage with industry and listen to feedback.

5. What we found

Applications to update pre-contractual disclosures have improved, as:

Firms have become more familiar with the requirements.
The number of labels on the market has increased, with a broadening range of asset classes and investment strategies.

However, it hasn’t always been clear whether or how firms meet the labelling requirements, or whether disclosures accurately reflect what the fund invests in.

5.1. What makes a good disclosure

Good disclosures are clear, concise, easy to read and understand. For example, they:

Avoid complex terms and explain those that are open to interpretation, such as ‘affordable’.
Avoid duplication.
Use a consistent narrative and logical flow of information.

They also:

Only disclose information relevant to the fund. For example, they don’t copy wording from our examples or peers’ disclosures.
Use the right label for the fund and meet the relevant requirements.
Accurately reflect what the product invests in. We ask for a model portfolio to check this as part of the authorisations process.

6. Examples of good and poor practice

The information below is not comprehensive, does not substitute the rules and guidance in the ESG Sourcebook and should not be used as templates for disclosures.

The examples show what we’ve observed in disclosures and do not reflect the breadth of potential investment approaches.

The labelling requirements accommodate funds:

Investing to pursue environmental and social outcomes.
In a range of asset classes and strategies.

The examples illustrate different aspects of some, not all, of the labelling criteria. They do not reflect how a single fund could meet the criteria. In practice, all disclosures for a fund would be consistent with the fund’s sustainability objective.

Under the anti-greenwashing rule[4], firms must make sure that any references to sustainability characteristics in disclosures are consistent with the sustainability characteristics of the product.

6.1. Sustainability Focus label

Sustainability objective

The sustainability objective must be:

Clear, specific and measurable.
Consistent with the aim of investing in assets that are environmentally or socially sustainable.

Referring to the UN Sustainable Development Goals (SDGs)[5] alone is not specific and unlikely to meet this requirement.

Good practice example

It’s clear that the objective is to invest in assets that are environmentally or socially sustainable.

The objective also briefly explains the sustainability characteristics.

Example wording: ‘The fund aims to invest in assets that make a positive contribution to the environment and society through their products/services in areas such as:

‘Climate change mitigation and adaptation – which includes...
‘Financial and digital inclusion – which we define as…
‘Health and wellbeing – such as…'

Poor practice example

The objective is not clear, specific and measurable. The reader cannot identify the specific environmental or social outcomes the fund is seeking to achieve.

For example, poor wording for the objective might say the fund aims to:

‘Make a positive contribution to planet and/or people.’
‘Contribute to SDGs.’
‘Create value for society.’
‘Invest in companies that meet a robust standard of sustainability.’

Negative outcomes and conflicts with the objective

Disclosures must include any material negative outcomes that might occur from pursuing a positive outcome.

Where the product invests in assets that are not pursuing the sustainability objective, those assets must not have attributes that conflict with that objective.

Good practice example

A fund invests in utility companies providing access to clean energy and clean water under a sustainable infrastructure theme. The disclosures outline potential negative outcomes from this investment approach, such as new infrastructure having an adverse impact on landscapes and biodiversity.

Poor practice example

Selecting a company based on some sustainable attributes without considering the complete picture, in other words, material negative outcomes or conflicts that might arise in relation to the products, services or activities of the wider company.

For example, a fund holds industrial conglomerates with some sustainable activities in certain business units but is also involved in carbon/water-intensive activities in many of its principal units, which is not disclosed.

Robust, evidence-based standard

For Focus and Improvers funds, at least 70% of the gross value of the product’s assets must be invested in line with its sustainability objective, and with reference to a standard of sustainability that is:

Robust (stands up to scrutiny).
Evidence-based (derived from or informed by an objective and relevant body of data or other evidence).
Absolute (as opposed to relative).

The standard should be applied in a systematic way (applied consistently).

Good practice examples

A scoring system that classifies assets as sustainable if they score 7 out of 10 includes a description of the criteria that assets would need to meet, or attributes that they would need to have, to get that score. This includes reference to external frameworks or principles, and may include examples of the types of assets that could meet each score.

The manager refers to these assets as ‘leading’. However, there is a clear ‘absolute’ standard of sustainability (the scoring system) that meets the criteria and the ‘relative’ term (‘leading’) is used in addition.

Poor practice examples

The standard of sustainability is not backed by evidence, or the firm refers to the fact that its peers have used a similar standard as evidence but cannot provide any authoritative evidence of its own.

Example 1

A general sportswear retailer is held in the fund on the basis that it meets the fund’s standard of sustainability and in doing so derives at least 50% revenue from ‘health and wellbeing’ products and services. However, when questioned, the firm cannot substantiate that claim.

Example 2

An asset scores 8/10, based primarily on good governance policies and without a clear indication of environmental or social outcomes. (Governance enables these outcomes, but it’s not an end in itself.)

Stewardship strategy and resources

The specific fund’s stewardship strategy and resources must support achieving the sustainability objective.

Poor practice example

The firm engages broadly on ‘ESG’ or ‘sustainability’ without explaining how this is consistent with the fund’s sustainability objective.

Key performance indicators (KPIs)

Under the labelling criteria, firms must identify and disclose KPIs that show progress towards the sustainability objective.

For Focus funds, KPIs will show the firm is meeting its sustainability objective.

This is separate to the requirement to disclose the proportion of assets invested in line with the sustainability objective. However, firms can set out both types of metrics in a ‘KPI’ section of their disclosure if they choose to.

Good practice examples

Example 1

A fund has a sustainability objective to invest in products/services across several themes.

It uses KPIs that show how the fund is invested across those themes.

Separately, it includes a KPI which will confirm at least 70% of the fund is invested in line with its objective.

Additionally, KPIs could measure environmental or social outcomes.

Example 2

Where a fund has an objective to invest in companies that focus on water and waste efficiency, it uses KPIs that measure water saved, waste reused and so on.

Fund holdings

Disclosures do not need to justify individual holdings, but the holdings in the model portfolio must be consistent with the disclosures and stand up to scrutiny.

Poor practice example

The fund holds a company that provides a range of products or services (such as a DIY store or supermarket).

The firm claims that 100% of the company’s revenues is derived from sustainability products/services but cannot substantiate that claim.

6.2. Sustainability Improvers label

Sustainability objective

The objective must be:

Clear, specific and measurable.
Consistent with investing in assets that can improve sustainability over time.

The Improvers label is not limited to climate-related objectives. You can use it for other environmental or social outcomes.

Good practice example

A social fund’s objective is to invest in assets that aim to improve labour standards, including paying the living wage across the supply chain.

The disclosure sets out how the firm intends to measure this outcome.

Poor practice example

A fund has a climate-related objective that is only based on reducing Scope 1 and 2 emissions, but gives the impression that the aim is to reduce ‘all’ emissions (including Scope 3).

Robust, evidence-based standard

Improvers funds’ assets must be selected with reference to a robust, evidence-based standard that is an absolute measure of sustainability (see the Focus fund section above for what this means).

Separately, firms must have evidence that the assets have the potential to meet that standard over time.

Good practice example

The firm selects assets that have the potential to meet an emissions target over a specified period of time.

The firm decides which assets have the potential to meet the standard based on disclosures, clear strategies, transition plans and so on.

For instance, it may include a defence and security company which has a public and Science-Based Targets Initiative-validated net-zero target, with:

Plans to achieve the target.
Formal accountability for interim and overall targets.
Annual disclosures to report progress.

Poor practice example

The firm assumes that assets will set decarbonisation targets, without any robust evidence to support this.

Key performance indicators (KPIs)

KPIs must show progress towards the sustainability objective, that is, progress towards meeting the standard of sustainability over time.

Good practice example

KPIs show decarbonisation where the fund’s sustainability objective is to invest in assets with the potential to decarbonise.

Disclosures may also include metrics to show the proportion of assets that are ‘on target’ to decarbonise as well as some contextual information.

For instance, the fund/assets reduced [x] tonnes of carbon dioxide equivalent compared to [y] baseline. This is [z]% progress towards the objective.

[X]% of the fund is on target to meet the decarbonisation objective. However, progress towards the objective may not be linear.

Escalation plan

There must be a clear escalation plan for assets that are not progressing sufficiently towards the objective. Firms should be able to clarify why their plans are appropriate, if asked.

Poor practice example

Firms continue to engage with companies that aren’t making progress towards the objective, with no timeframe for them to respond to the engagement, or next steps if they don’t. Or, the timeframe for engaging with assets does not align with the short and medium-term targets for the fund.

6.3. Sustainability Impact label

Sustainability objective

The sustainability objective must:

Be clear.
Specify pre-defined, measurable positive impacts that the product aims to achieve.

The link to positive environmental or social outcomes must be clear.

Good practice example

The fund aims to make a positive impact by investing in companies from 4 environmental impact areas:

climate action
clean energy
water efficiency
biodiversity

The outcomes are clear in each of these areas (for example, increasing clean energy generation through low and zero-carbon alternatives and improving access to clean energy).

Poor practice example

Funds seek broad or unmeasurable impacts.

Delivering social impact through the ‘development of thriving cities’ or ‘building an inclusive economy’, without explaining what these mean or how they will be measured.

Theory of change

Your theory of change must set out what change is expected in a particular context, how and why, with clear examples. It must describe how the assets and investment activities are expected to contribute to the positive, measurable impact.

Good practice examples

Example 1

A health fund targets areas that lack services. Specified outcomes include increased hospital bed capacity and new clinical space, which are reflected in the KPIs.

Example 2

A fund’s assets aim to provide the general population with access to education.

The firm clearly sets out what change it expects, such as:

Expanding to less developed economies.
Improving access to education through online resources.

Poor practice example

A fund invests in banks or insurers providing basic financial services to the general population.

However, the firm does not clarify:

What change it expects by investing these assets, or why.
How its investment activities will make a positive impact.

Investment activities

As part of the theory of change, firms must describe how you expect your activities to help achieve your sustainability objective, such as through engagement or directing new capital.

The activities must be measurable.

Good practice example

The firm engages with the assets on core topics about the sustainability objective, with clear milestones. This could include engaging with management to guide capital spending towards sustainable outcomes and therefore boost impact.

The firm measures how the companies respond to this engagement. In its disclosures, it includes KPIs that measure whether the company is delivering greater impact. The firm does not claim sole responsibility for any outcomes achieved.

As well as helping achieve positive impacts, the firm may also engage to help the assets to mitigate negative impacts.

Key performance indicators (KPIs)

Firms may disclose the types of KPIs you will use to measure progress towards the objective. These may be qualitative or quantitative.

You don’t need to indicate what the value of each KPI will be in future.

Poor practice example

The KPIs are not consistent with the objective and theory of change.

For example, if the theory of change relates to improvements to financial inclusion for specific communities but the KPIs measure bank accounts provided, or insurance paid out, to the general population.

6.4. Sustainability Mixed Goals label

Firms can use the Mixed Goals label for all in-scope funds.

Check the examples above for what is relevant and appropriate to your firm, depending on which combination of labels your firm uses.

Sustainability objective and 70% threshold

The fund’s objective must be to invest in line with the criteria for 2 or more of the sustainability labels.

Each label has specific criteria that assets must satisfy in order to qualify under that label.

Poor practice examples

The fund intends to invest in assets that focus on sustainability (Focus) or have the potential to improve over time (Improvers). However, all assets have Improvers’ attributes, and it is not clear which assets already meet a standard of sustainability and are therefore considered Focus.

Although an asset makes up 10% of the fund’s gross value, the firm counts this as 10% towards a ‘Focus proportion’ of the threshold as well as 10% of an ‘Improvers proportion’. It is double counted.

Robust, evidence-based standard

The evidence for the standard of sustainability must be robust and stand up to scrutiny, including where multiple standards are used.

See the examples above.

Share

1. Who this applies to

2. Relevant rules and guidance

3. What we looked at

4. Background

5. What we found

5.1. What makes a good disclosure

6. Examples of good and poor practice

6.1. Sustainability Focus label

Good practice example

Poor practice example

Good practice example

Poor practice example

Good practice examples

Poor practice examples

Example 1

Example 2

Poor practice example

Good practice examples

Example 1

Example 2

Poor practice example

6.2. Sustainability Improvers label

Good practice example

Poor practice example

Good practice example

Poor practice example

Good practice example

For instance, the fund/assets reduced [x] tonnes of carbon dioxide equivalent compared to [y] baseline. This is [z]% progress towards the objective.

6.3. Sustainability Impact label

Good practice example

Poor practice example

Good practice examples

Example 1

Example 2

Poor practice example

Good practice example

Poor practice example

6.4. Sustainability Mixed Goals label

Poor practice examples