UK Sustainability Disclosure Requirements (SDR) policy statement – key changes

• An anti-greenwashing rule for all FCA-authorised firms to reinforce that sustainability-related claims must be fair, clear and not misleading.
• Naming and marketing rules for investment products, to ensure the use of sustainability-related terms is accurate.
• Investment labels to help consumers navigate the investment product landscape and enhance consumer trust.
• Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product.
• Detailed information targeted at institutional investors and consumers seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures.
• Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

What are the key changes since CP22/20?

The FCA received 240 responses to the SDR consultation paper CP22/20 (which was published in October 2022). The key changes between the consultation paper and the policy statement are:

Anti-greenwashing rule

• The anti-greenwashing rule will no longer apply immediately on publication of the policy statement. Instead it will come into force on 31 May 2024. To provide further clarity the FCA published a consultation today (GC23/3) on guidance for the anti-greenwashing rule. The consultation was published today, for response by 26 January 2024.

Naming and marketing

• The FCA has made some amendments that enable firms to continue using sustainability-related terms in their fund names (even if the fund doesn’t meet one of the four sustainability labels) and associated marketing if certain conditions are met. These include producing certain disclosures and a statement to clarify that the product does not use a sustainability label and why.

Investment labels

• There will be four investment labels instead of three. All of the labels will be re-named to start with the word ‘sustainability’ instead of ‘sustainable’.
• A new ‘Sustainability Mixed Goals’ label will be introduced to accommodate funds that invest in a blend of the other three sustainability investment labels. This will be good for consumers who have smaller investment pots in funds that have broad sustainability coverage. Firms using the ‘Sustainability Mixed Goals’ label will need to meet the requirements under the specific criteria for each of the other labels the fund is invested across.
• There are some amendments and clarifications associated with the ‘Sustainability Improvers’ label. Stewardship-related requirements have been removed for this label; they will instead apply as part of the general criteria The FCA has added a rule to clarify that the potential to become more environmentally or socially sustainable over time means the potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability over time. This approach puts greater emphasis on the firm’s asset selection process. Firms must select assets on the basis of evidence that they have the potential to improve over time.
• For the ‘Sustainability Focus’ label the FCA has removed the term ‘credible standard’. It has replaced it with a ‘robust, evidence-based standard that is an absolute measure of sustainability’. Firms will need to determine a standard that aligns with their product’s sustainability objectives, and select assets that meet the standard, based on a methodology or approach that is determined by industry practice, an authoritative body or proprietary standards. The standard may be based on general environmental and/or social criteria such as the percentage of revenue associated with sustainability matters; reference an authoritative taxonomy such as the EU taxonomy or forthcoming UK Green Taxonomy; or set a minimum threshold of greenhouse gas (GHG) emissions for assets. It must however be robust (i.e. stand up to scrutiny), and evidence-based (i.e. derived from or informed by an objective and relevant body of data or other evidence).
• For the ‘Sustainability Focus’ label the FCA has clarified that they have not prescribed whether the independent assessment should be via an internal process or a third party, provided that it is independent to the manager’s investment process. Firms may consider their existing internal processes or functions to be appropriate for the assessment as long as those carrying out the assessment are appropriately skilled. For transparency, firms will need to disclose the basis on which the standard is considered to be appropriate, and the function or third party that undertook the assessment (but not the name of the individual).
• For the ‘Sustainability Impact’ label the FCA has removed the reference to ‘real-world’ impact throughout the criteria. Firms are not required to invest new capital for their products to qualify for this label. This means that investments in public markets can qualify for use of the label as long as other criteria are met.
• 70% minimum threshold. The 70% minimum threshold will now apply to all labels. This means although the sustainability objective should represent the aims of the overall product, the product may invest in other assets for liquidity and risk management purposes, so long as 70% of the gross value of the product’s assets are invested in line with the sustainability objective of the fund.

Consumer disclosures

• The FCA acknowledges that it may not be proportionate at this stage for products not using sustainability-related terms in their names and marketing to have a consumer-facing disclosure. So, the final rules only require consumer-facing disclosures for labelled products and products using sustainability-related terms in their naming and marketing (with the exception of where terms are used to make short, factual, non-promotional statements in marketing materials). Consumer-facing disclosures for products not using labels but with sustainability-related terms in their names or marketing must include a statement to clarify that the product does not have a label.

Entity-level disclosures

• The FCA has added a Handbook guidance provision stating that firms should consider disclosing their impact on the environment and/or society, having regard to the Global Reporting Initiative (GRI) Standards.
• The FCA has referenced the ISSB, SASB and GRI standards as documents to consider when firms are determining the content of their disclosures.

Portfolio Managers

• The FCA will consult on an alternative approach for applying the regime to all types of portfolio managers. The FCA received feedback that their proposed approach for portfolio management would not be suitable, particularly as most portfolios are diversified and unlikely to invest only in UK funds with labels. Among the suggestions to address the matters raised were requests to allow portfolio managers to assess the assets within their portfolio against the criteria for labels – to follow a similar approach for portfolio management as was proposed for funds. The FCA will consult on proposals, in early 2024, to follow a similar approach for portfolio management, with a focus on where portfolio management is undertaken for UK retail clients, including managed portfolios and discretionary wealth management services.

Implementing Guidance

• Some of the proposed Implementing Guidance has been moved into final Handbook rules and guidance to help firms better understand the requirements and the FCA’s expectations. The Implementing Guidance is no longer a standalone non-Handbook guidance document.

Role of Advisors

• The FCA continues to explore how to clarify their expectations for advisers around taking sustainability matters into account in investment advice and suitability. They plan to establish an independent working group for the advice industry to help build on existing capabilities in sustainable finance, including how the SDR and labels support advisors’ role.

Implementation timelines