Putting a label on it: SDR for managed portfolios
Posted 24 August 2026
For professional financial advisers only
The FCA’s sustainability labelling regime, governed by its Sustainability Disclosure Requirements (SDR), doesn’t currently apply to model portfolio services (MPS) in the UK. SDR labelling applies to funds within portfolios – governing when those funds can use sustainability-related terms – but the FCA “paused indefinitely” the rollout of its labelling regime for MPS in April 2025. The regulator said it would focus on its pending review of MPS and consumer duty instead, leaving the UK wealth management “in SDR limbo”, in the words of CityWire.1
We have always welcomed SDR and the FCA’s attempts to provide clear guidance for ESG investment. Applying SDR labels designed for funds to overall portfolios is tricky, however, as the FCA recognises.
Applying a label to an SDR portfolio?
SDR lists four sustainability labels funds can use: Sustainability Focus (70% of assets meeting credible sustainability standards), Sustainability Improvers (improving unsustainable assets through engagement), Sustainability Impact (investing to materially improve the world) and Sustainability Mixed Goals.
The UK Sustainable Investment and Finance association reported that 150 UK funds had taken up a label as of October 20252. Looking at data available on Morningstar – which may exclude certain funds – we can find 111 UK funds of the oldest share class, featuring an SDR label, available to sterling-based investors. Of those 111, 77 are labelled “Sustainability Focus” (69%), 16 are “Sustainability Improvers” (14%), 12 are “Sustainability Impact” (11%) and just 6 are “Sustainability Mixed Goals (5%).
That compares with a universe of 3,752 sterling-denominated funds in the oldest share class but without requiring the label (if you didn’t restrict to the oldest share class or sterling-listed shares, the universe would be well over 100,000). The low number of funds to choose from is a challenge for building and labelling a sustainable portfolio.
How should a manager determine whether an investment portfolio can be called “sustainable”? The FCA’s original proposal in its consultation was that a portfolio can use a particular sustainability label. (SDR rules list four labels for various sustainability characteristics) if 90% of its constituent products qualify for the same label.3
Only one UK MPS manager, Elston Consulting, has created an SDR compliant MPS portfolio range, which it says have a 100% allocation to SDR-compliant funds.4 Elston claims this is now possible due to the increased number of SDR-labelled funds available – following slow uptake of labels when the rules first came in.
It’s good that there are more SDR-labelled funds to choose from than there once were, but the universe is still restrictively low for diligent portfolio management. When selecting a fund to fill a particular role within our portfolios (e.g. US mid cap) we will typically review a long list of 10-20 funds to make sure we give clients the best option. For SDR-labelled funds, it would be simply impossible to construct that long list.
Problems
If funds keep pursuing SDR labels, the availability issue should eventually improve. But that is a big ‘if’: the costs associated with pursuing an SDR label are prohibitively high, and many fund managers do want to tie themselves to a particular label until the regulation becomes clearer.
The idea that SDR labels should be attached to portfolios on the basis of how many constituent funds have that label is problematic. A diversified portfolio is supposed to balance various investment goals – but focussing on a single label can disrupt that balance. We struggle to see, for example, how a portfolio made up entirely of “Sustainability Impact” funds would be appropriately diversified for the risk preferences of most clients – because the sorts of companies that meet that criteria are likely to skew towards long-term growth. A growth skew might be fine for certain investors, but others will want more balance.
Out of the four SDR labels, the best fit for portfolios would, presumably, be “Sustainability Mixed Goals”, since it could blend various objectives. But would this have to be a portfolio of funds with the “Sustainability Mixed Goals” label, or could it be a sustainable portfolio made of funds with a mix of labels? If the former, Morningstar data shows just 6 funds a portfolio manager can work with.
It’s unclear how much variation is allowed even within a single label. If qualifying for a particular label requires funds to all adopt similar strategies or hold similar assets, that would increase the concentration risk at the portfolio level. Alternatively, we might end up with more differentiated funds – like the current set-up, only with a sustainability flag attached – but only time will tell.
A practical holistic approach
Funds are different to portfolios – in the same way that individual shares are different to funds. MPS providers try to balance investment aims in a holistic way. Why shouldn’t we treat ethical principles for investment in the same way?
Perhaps the best way to integrate sustainability principles into portfolio management isn’t to specify the proportion of assets meeting a certain criteria, but to make sustainability goals a part of the overall investment framework itself.
We do this by surveying advisers for the ethical concerns of their clients and formulating our Ethical Investment Process on that basis. Specifically, we limit, as much as possible, exposure to ‘no-go’ industries (e.g. oil and gas, animal testing) within our Ethical Portfolio. Those negative screens are decided by the values of our clients, as reported by advisers.
It doesn’t make a difference to this process whether or not a fund comes with an SDR label. Certain labelled funds might still have exposures that our clients don’t want, and non-labelled funds might lack those exposures but still provide better outcomes for clients.
All portfolio managers aim for consistent long-term returns and try to mitigate excessive risks. We think of these risks and returns in monetary terms – but there’s no reason this basic idea couldn’t be applied to sustainability goals too. What if, as well as monetary returns, we included positive ESG impacts and improvements? What if, as well as monetary risks, we mitigated environmental risks? Many wealth managers already include metrics like these in their reporting. It would be possible to award SDR labels to portfolios on the basis of how they minimise sustainability risks and maximise impact – rather than how many funds they have with particular labels. That might be one way to avoid problems of imbalance.
Making sustainability about the process, rather than the composition, will bring its own problems. But applying labels based on composition has problems too, and it’s not obvious that the original approach will deliver better outcomes for investors. We hope policymakers consider all these approaches in deciding how to apply SDR to portfolios.
For more information visit tattoninvestments.com/products/tatton-ethical, call us on 020 7362 6827, or speak to your usual Business Development Director.
1 https://citywire.com/wealth-manager/news/we-re-pretty-much-in-the-same-place-wealth-sector-in-sdr-limbo/a2486096
2 Read the report: https://uksif.org/wp-content/uploads/2025/10/2417-UKSIF-SDR-report-2-v4b.pdf
3 Read the consultation: https://www.fca.org.uk/publication/consultation/cp22-20.pdf
4 Elston’s press release: https://www.elstonsolutions.co.uk/insights/elston-launches-range-of-sustainable-portfolios-with-100-allocation-to-sdr-compliant-funds