FCA publishes final rules on Sustainability Disclosure Requirements (SDR) and investment labels

Sustainable finance regulation

Jessica Reed

Nina Caplin

Today, the Financial Conduct Authority (FCA) published their long-awaited policy statement PS23/16: Sustainability Disclosure Requirements and Investment Labels. The package of measures include:

  • An anti-greenwashing rule for all authorised firms;
  • Four “sustainability” investment labels;
  • New rules and guidance for firms marketing investment funds on the basis of their sustainability characteristics;
  • Consumer-facing information to enable consumers to understand the key sustainability features of a product;
  • Detailed information in pre-contractual, ongoing product-level and entity-level disclosures aimed at institutional investors and consumers wanting more information;
  • Requirements for distributors (for example, platforms and advisers).

The policy statement and final rules were originally due to be published by the end of Q2, but due to significant feedback it received, the FCA delayed the publication. The FCA has also published general guidance for consultation (GC23/3) on the anti-greenwashing rule, alongside information for consumers on identifying sustainable investments.

The FCA has made a number of changes to its original proposals, including introducing a fourth label (the new “sustainability mixed goals” label) and delaying the implementation of the anti-greenwashing rule. Portfolio management, pension products and overseas funds are currently excluded from scope.

The FCA has aimed to create international interoperability and has mapped its rules to international counterparts. The EU is currently consulting on potential changes to its own sustainability disclosure regime.

Background to the SDR

The FCA published its consultation paper on Sustainability Disclosure Requirements (SDR) and investment labels (CP22/20) in October 2022 (see our previous article). It set out proposals, including a labelling regime with the aim of tackling greenwashing in the market for sustainable investment products. The proposals had the protection of retail investors as their focus.

The proposals set out a starting point for what the FCA envisioned would be an expanding regime, initially focus being on UK funds and portfolio managers, with later proposals to cover a) overseas funds marketed into the UK and b) FCA-regulated asset owners in respect of their investment products.

The proposals in part sought to increase the UK regulatory position on sustainability disclosures with the EU’s SFDR, though the FCA proposals went further in proposing a specific consumer-focussed labelling regime, beyond bare disclosure requirements.

The initial SDR consultation paper proposed:

  • A system of three sustainable investment labels which firms can use on products which meet specified sustainability criteria (“sustainable focus”, “sustainable improvers”, and “sustainable impact”).
  • A general “anti-greenwashing” rule applicable to all authorised firms.
  • A new requirement for consumer-facing disclosures
  • Additional product and entity level disclosures, building upon TCFD-aligned reporting requirements.

The requirements were set to be implemented at the earliest on 30 June 2024, with the exception of the anti-greenwashing rule which the CP proposed to implement upon publication of the SDR policy statement.

As well as considering consultation responses from 240 stakeholders, the FCA also took into account the results of its recent multi-firm review, the Treasury Sub-Committee’s inquiry on greenwashing and SDR, consumer testing and other feedback it has received.

What has changed from the original proposals?

The FCA has made some significant changes, further to concerns raised by industry and other stakeholders regarding its proposals, including:

  • Portfolio management products and services have been excluded from the scope of the investment labels and disclosure regime for the time being. This is a significant change. The initial proposals included discretionary portfolios within the definition of “sustainability product” and included distinct criteria for discretionary strategies wishing to use a label. However, these were broadly felt to be unworkable by the industry. The FCA has now carved discretionary portfolios out of the new rules and intends to consult on labelling proposals for this product type in Q1 2024.
  • One of the key criticisms of the initial proposals was that the naming and marketing rules were too restrictive. The FCA have responded by amending the naming and marketing rules to allow asset managers to promote non-labelled funds with ESG characteristics. This means that non-labelled funds will now be able to use terms such as “green”, “net-Zero”, “responsible” and so on when marketing. However, there will be rules regarding how these types of funds are marketed and a requirement for consumer-facing disclosures to clearly state how it is invested and why it does not use a label. It will still be the case that no fund may include the word “sustainable” or “impact” in its name if it does not use a label.
  • The labelling regime now includes a fourth “Sustainability Mixed Goals” label for funds that invest across a blend of different sustainability objectives. There is a population of sustainable funds which would not have fit neatly into the “focus”, “improvers” or “impact” labels because their investment strategy contains attributes of more than one label. The new “sustainability mixed goals” label will mean that these funds are now able to apply a label if they meet the qualifying criteria.
  • The new anti-greenwashing rule which applies to all authorised firms remains substantially the same, but will be supplemented by new guidance. The FCA have pushed back the implementation date of this new rule to 31 May 2024, to allow a period of consultation on the new guidance, which was also published today as GC23/3. The deadline for input is 26 January 2024.

Anti-greenwashing guidance

The anti-greenwashing rule (ESG 4.3.1R) requires all FCA-authorised firms to ensure that any references they make to the sustainability characteristics of their financial products and services are consistent with the sustainability characteristics of the product or service and are fair, clear and not misleading.

Sustainability characteristics can relate to the environmental and / or social aspects of products and services, for example referring to a pension fund as being “socially responsible”, or a mortgage as being “green”. The FCA expects such sustainability references to be:

  • Correct and capable of being substantiated through evidence.
  • Clear and presented in a way that can be understood.
  • Complete: considering the full life-cycle of the product or service and not obscuring important information.
  • Fair and meaningful in relation to any comparisons to other products or services.

The FCA reminds firms that they should also consider the application of the Consumer Duty, as well as general consumer law and applicable CMA and ASA guidance.

The guidance provides some helpful practical examples of wording or images a firm might use in its marketing which could be misleading, such as a picture of a rainforest when only one of the products offered actually has a sustainability label, or calling itself the “greenest car insurance” without information on what this claim is based on.

Consumer Information

As part of its suite of materials, the FCA published information for consumers about the new labelling regime and what it means for investors in funds that are described as sustainable. It provides information on the four labels and what they mean, and why a firm might not have a label. It also informs consumers that from 31 July 2024 they will see the following changes:

  • Labels on investment funds that have a specific environmental or social goal;
  • Clear and simple information on what that goal is and the approach to achieving it, and annual updates on progress towards it; and
  • If a fund doesn’t include a label but is making sustainability claims, access to clear and simple information explaining how it’s invested and why it doesn’t have a label.

Next steps

  • 26 January 2024 – The FCA’s consultation on GC23/3 (guidance in relation to the greenwashing rule) closes.
  • Q1 2024 – The FCA will consult on the extension of the investment labelling and disclosure regime to discretionary portfolio strategies.
  • 31 May 2024 – Anti-greenwashing rule and guidance comes into force.
  • 31 July 2024 – Firms can begin to use labels, with accompanying disclosures.
  • 2 December 2024 – Naming and marketing rules come into force, with accompanying disclosures.
  • 2 December 2025 – Ongoing product-level and entity-level disclosures for firms with assets under management of over £50bn.
  • 2 December 2026 – Entity-level disclosure rules extended to firms with assets under management of over £5bn.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2023

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