Are MPS providers at risk of greenwashing?
The UK’s Sustainable Disclosure Requirements (SDR) regime came into effect in May 2024, aiming to bring greater clarity and accountability to sustainable investing, both at the product and firm level.
In the world of funds and Managed Portfolio Services (MPS), terms like ESG, ethical, SRI and responsible are used extensively to describe different green investment solutions. But what do these similar but different terms actually mean? And more importantly, what evidence supports these labels?
While SDR rules are now in force for funds, guidance for MPS providers has been repeatedly delayed. This regulatory limbo increases the risk – whether accidental or intentional – of greenwashing by MPS providers.
What Are the SDR Rules?
The Financial Conduct Authority (FCA) introduced the SDR framework to combat greenwashing – where investments are marketed as sustainable without sufficient backing. The rules are designed to ensure that sustainability claims are accurate and not misleading.
Adoption was initially slow. Meeting SDR standards requires a thorough review of investment strategies, holdings, and marketing materials. However, momentum is now finally building in the funds space, with over 60 SDR-labelled funds now available and more on the way.
Understanding the SDR labels
The SDR regime introduces four distinct labels to help investors understand a fund’s sustainability objectives:
- Sustainability Focus
- Sustainability Improvers
- Sustainability Impact
- Sustainability Mixed Goals
These labels are part of a broader package that includes naming, marketing, and disclosure rules for all FCA-authorised firms offering investment products with sustainability claims. The goal is to empower investors to make informed decisions aligned with their values.
SDR v SFDR: UK and EU approaches
While the UK has SDR, the EU operates under the Sustainable Finance Disclosure Regulation (SFDR). Both aim to increase transparency and reduce greenwashing, but they differ in approach.
The UK’s SDR is objective-driven, with strict criteria for using terms like sustainable. Only products meeting specific standards can use these protected terms. In contrast, the EU’s SFDR is more definitional and lacks restrictions on certain words and terminology.
This divergence affects how EU-domiciled funds are marketed in the UK. Most ETFs, for example, are Irish-domiciled and not currently SDR-compliant, creating a gap in the market.
What About Portfolio Management Services?
While SDR rules are clear for funds, there’s still no formal guidance on how they apply to discretionary Managed Portfolio Services (MPS).
In Consultation Paper CP22/20, the FCA suggested a 90% allocation to SDR-compliant funds as a threshold for a sustainable portfolio. This was later revised to 70% in CP24/8 – a more realistic target given the limited availability of SDR funds at the time.
But with the growing number of SDR-labelled funds, is 70% still the right benchmark? We believe this deserves further scrutiny.
Unfortunately, further FCA guidance has been delayed. Implementation for portfolio managers was pushed from December 2024 to allow for more policy review in early 2025. In April 2025, it was delayed again, with the FCA prioritising its multi-firm review into model portfolio services. We expect SDR considerations to form part of that review.
Pending this review, which could take some time, we are recommending that IFA and Discretionary Portfolio Managers (DPM) get ahead of it, by considering how to incorporate SDR principles into their model portfolio design, manufacturing and labelling.
Labelling by MPS providers
In the absence of formal SDR extension to MPS, the market remains a patchwork of allegedly green offerings — Ethical portfolios, ESG portfolios, Impact portfolios. But how many of these actually hold SDR-compliant funds? That’s far from clear.
While SDR has reduced greenwashing risk for fund providers, the same cannot be said for MPS. Without clear rules, there’s a higher of risk intentional or unintentional greenwashing of MPS services that are marketed as sustainable.
Until the FCA provides definitive guidance, advisers should be asking tough questions of MPS providers: How green is your green? Is it deep green, light green—or just washed green?!
Photo by David von Diemar on Unsplash
