Following consultation, on 28th November the Financial Conduct Authority (FCA) released its long-awaited policy framework on Sustainability Disclosure Requirements (SDR) and investment labels. The FCA’s aim is that financial products that are marketed as sustainable should do as they claim, have more transparency and consistency in reporting and give consumers the ability to understand and differentiate between sustainable funds.
The lack of standardised terminology for terms such as ‘ESG’, ‘sustainable’ or ‘green’, often used loosely or interchangeably, risked greenwashing and an erosion of trust in a rapidly growing market for sustainable investments. The objectives of the SDR are therefore to protect consumers, mainly retail investors, through better information and product labelling, enhance market integrity, support competition in financial services and, ultimately, assist with the UK’s target to reach net zero by 2050.
There is staged implementation process:
31.05.2024 The anti-greenwashing rules and guidance, which applies to all FCA-authorised firms who make sustainability-related claims about their products and services, come into force
31.07.2024 Firms can begin to use labels and accompanying disclosures
02.12.2024 Naming and marketing rules come into force
02.12.2025 Ongoing product level and entity level disclosures for firms with assets under management in excess of £50 billion
02.12.2026 Entity level disclosures extended to firms with assets under management in excess of £5 billion
The anti-greenwashing rule applies to all FCA-authorised firms who must ensure that sustainability-related claims are fair, clear and not misleading and are consistent with the profile of the product or service. The rule applies to all communications about the environmental and/or social characteristics of financial products and services and extends to all of the ways in which sustainability could be represented, for example statements, assertions, information, images, policies, strategies, and targets.
Although the FCA’s proposal had been for this rule to come into effect immediately on publication of its SDR policy statement, its implementation has been delayed to May 2024 as the regulator is currently consulting on anti-greenwashing guidance.
The FCA will also be looking very closely at how funds are named. Sustainability-related terms can only be used in product names and marketing provided they use one of the four labels.
Three labels had initially been proposed, to which a fourth has now been added. They do not represent a hierarchy.
For all labels, at least 70% of the product’s assets must be pursuing the environmental and/or social sustainability objective, determined using a robust, evidence-based standard, which is an absolute measure of sustainability. The balance assets must not be in conflict with the sustainability objective.
It is encouraging to note the requirement for clarity and brevity (consumer-facing disclosures should not exceed two pages), and prominent placement on any digital mediums through which the product is offered, e.g. webpages, mobile apps. The information must include the product’s sustainability objective and label, the investment policy and strategy, what will be included or excluded from investment, relevant metrics and where further sustainability information may be accessed.
Ongoing product reporting - disclosures to be provided annually – will provide investors with information on how the fund’s or product’s pre-contractual aims and commitments set in relation to sustainability are actually being achieved and delivered.