The UK Financial Conduct Authority (FCA) has published a policy statement confirming the final rules under the Sustainability Disclosure Requirements (SDR) and investment labels regime.
Released in November 2023, this regime forms part of the FCA’s broader environmental, social, and governance (ESG) initiative and aligns with international measures, including the EU Sustainable Finance Disclosure Regulation and the Securities and Exchange Commission’s (SEC’s) climate-related disclosure rules.
ACA Global, a RegTech offering scalable compliance, risk and technology solutions, recently delved into the FCA’s sustainability disclosure requirements and what firms need to know.
The policy statement follows extensive revisions to the initial proposals outlined in a consultation paper from the previous year. Feedback from stakeholders led to an alternative approach for consulting portfolio managers and the introduction of a fourth investment label alongside the original three.
The main goal of these new requirements is to provide consumers with consistent and reliable information about funds marketed as sustainable investments. The FCA aims to address concerns over misleading sustainability claims, commonly known as greenwashing. The FCA stated, “The regime will support consumers in navigating their investments with trust that the products they are buying do as they say they will.”
The FCA’s ESG sourcebook lists specific sustainability-related terms. Firms using these terms for investment products aimed at retail clients must comply with new requirements. These include ensuring that product names accurately reflect their sustainability characteristics and avoiding certain terms unless used factually.
Firms must also provide a clear explanation of the purpose of any sustainability label on their website. This includes a standard statement or a firm-specific explanation, and the declaration, “This product does not have a UK sustainable investment label,” with reasons for this choice.
Three categories of disclosures are required for each product:
- Consumer-facing disclosure: This document must include key information about the firm and the product, a summary of the manager’s investment policy and strategy, and key sustainability characteristics. It should be concise, clear, and no longer than two A4 pages.
- Pre-contractual disclosures: These must be included in a product’s private placement memorandum (PPM) or prospectus and detail the manager’s investment policy, strategy, and sustainability characteristics.
- Annual sustainability report: This report should provide detailed information on the product’s adherence to its sustainability goals and must be published annually on the firm’s website.
Unlike the EU’s regulations, the FCA will not provide templates for these disclosures but encourages industry-led templates.
The naming and marketing rules apply to UK UCITS management companies and UK AIFMs managing UK AIFs. Firms using sustainability-related terms factually only are exempt from disclosure requirements. However, most funds with sustainable investment objectives are expected to either use an investment label or comply with the naming and marketing requirements.
On 23 April 2024, the FCA proposed extending SDR, including naming and marketing rules, to portfolio managers. These managers can use sustainability labels if their offerings meet the criteria and must publish consumer-facing disclosures and explanations for not using a label.
The consultation on this extension closes on 14 June 2024, with final rules expected in the second half of 2024, and implementation from 2 December 2024. HM Treasury also plans to consult on extending SDR to include overseas funds recognised under the UK’s overseas fund regime.
Simultaneously, the FCA has released final guidance on the new anti-greenwashing rule, effective from 31 May 2024. This rule mandates that firms ensure any sustainability-related claims are fair, clear, and not misleading. The guidance highlights that sustainability references should be accurate, clear, and complete, with fair comparisons.
For more information about the FCA’s sustainability disclosure requirements, read the full story here.
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