FCA announces sustainability disclosure requirements (SDR) policy

The announcement was confirmed in a new policy statement issued by the FCA on Tuesday (212-page / 3MB PDF) and forms part of a wider package of ‘ESG’-related interventions outlined in the paper – including a new ‘anti-greenwashing’ rule which will take effect at the end of May next year across all UK financial services. The FCA had consulted on introducing such proposals last winter.

Hayden Morgan of Pinsent Masons, who advises organisations on sustainability issues, said: “Although there will be implementation challenges, the UK’s long-awaited SDR regime has been well-considered, with detailed and demonstrable consultation with asset managers, asset owners, and other financial services stakeholders.”

“The FCA has clearly given some consideration to the operational implications of its new rules. This reflects the benefit of the second mover advantage the UK’s FCA has had over other regulators and legislators in the development of a pragmatic, yet robust, sustainable finance policy regime – with the EU having already developed its thinking under the Sustainable Finance Disclosure Regulation (SFDR). However, there remain question marks around future interoperability considerations of the FCA’s anti-greenwashing rule and how the new rules will interface with the planned UK ‘green’ taxonomy,” he said.

“Furthermore, the operational interaction with other international disclosure requirements, such as SFDR, and potential forthcoming labelling regimes, will create a potential challenge for those managers having to respond to a dynamic sustainability compliance, operational implementation, and disclosure landscape,” Morgan said.

In relation to labelling, the FCA’s new regime would apply to investment products. Asset managers could select one of four ‘labels’ to apply to investment products where those products seek “positive sustainability outcomes” – either environmental or social – provided the products meet set criteria to qualify for labelling. Criteria include that at least 70% of the product’s assets are selected “with reference to a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability”, and that progress towards the outcomes can be measured via key performance indicators (KPIs).

The FCA confirmed rule changes to prevent asset managers from “using any sustainability-related terms in their product names and marketing” for any products that do not use one of the four labels – unless they meet a series of product name, disclosure and statement conditions. Even then, certain naming terms – including ‘sustainable’, ‘sustainability’ and ‘impact’ – can only be used in respect of products that use a label. The FCA said that products marketed as ‘ethical’ investments will be subject to its new naming and marketing rules where they have and are marketed as having sustainability characteristics.

Firms will be able to use the new labels from 31 July 2024, with the new naming and marketing rules then set to apply in addition from 2 December 2024.

Sustainable finance expert James Hay of Pinsent Masons said: “The FCA maintains the stance that a sustainability label is not warranted for funds which integrate ESG but which do not meet the criteria for other labels. On the other hand, the European Commission envisioned the possibility of using such a label under its recent consultation on the EU Sustainable Finance Disclosure Regulation (SFDR).”

The labelling regime will operate in tandem with new disclosure requirements. Asset managers will be required to make a series of sustainability-related disclosures, including at the pre-contractual stage and on an ongoing basis about their products and, where they manage assets worth more than £5 billion, at the entity level also.

The requirements build on disclosures firms are already required to make, which are linked to recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) – requirements the FCA intends to update to take account of new, broader, sustainability disclosure standards finalised earlier this year by the International Sustainability Standards Board (ISSB).

The consumer-facing disclosures are designed to enhance consumers’ understanding of products’ “sustainability characteristics” and must be outlined in a standalone document and presented in a prominent place on the product webpage, app or other digital medium, alongside other key investor information. Asset managers must disclose “details of any types of assets held for reasons other than to pursue the sustainability objective [in the product] and why these are held”, as well as “any material negative environmental and/or social impacts that may arise (or have arisen) in pursuing the sustainability objective”.

The FCA has outlined minimum information that must be disclosed where a product without a label uses sustainability-related terms in naming or marketing. The consumer-facing disclosure must be reviewed and updated at least annually.

On so-called entity-facing disclosures, the FCA said firms can use the ISSB standards as a baseline and it added that it encourages the development of industry-led guidance to help specify the types of information that may be useful for asset managers to disclose.

Under the anti-greenwashing rule, all FCA-authorised firms will be required to ensure that sustainability-related claims made about financial products or services are “fair, clear, and not misleading, and consistent with the sustainability profile of the product or service”. The FCA said its proposals had received the support of most respondents to its consultation. It has opened a related consultation on associated guidance which it said would provide clarification of its expectations. That consultation closes on 26 January 2024, with the new rule then due to take effect from 31 May 2024.

“Our aim with this Sustainability Disclosure Requirements (SDR) and investment labels regime is simple – financial products that are marketed as sustainable should do as they claim and have the evidence to back it up,” said Sheldon Mills, executive director of consumers and competition, and Sacha Sadan, director of environmental, social and governance, at the FCA, in a joint foreword to the policy statement.