Climate, nature and sustainability – Q4 2023 - Forvis Mazars

These rules detail principles and regulations on how UK-authorised funds, and other in-scope products and services, must disclose sustainability characteristics. Also, how funds can have a sustainability label if the funds meet certain sustainability criteria. Just as importantly, the rules introduce greenwashing as a ‘foreseeable harm’ under Consumer Duty.

Key features of the new rules are:

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.
Four labels to help consumers navigate the investment product landscape and enhance consumer trust in investments with sustainability criteria:
- Sustainability focus – aim, to invest in environmental and/or socially sustainable holdings, using selection criteria that are robust and have evidenced-based standards.
- Sustainability improvers – for portfolios that aim to transition to sustainability over a stated period of time, using selection criteria that are robust and have evidenced-based standards.
- Sustainability impact –portfolios that aim to achieve a positive impact that is pre-defined and measurable, using selection criteria that are robust and have evidenced-based standards.
- Sustainability mixed goals – for portfolios with blended sustainable strategies; a stated combination of the other labels qualifying criteria.
Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product.
Detailed information in pre-contractual, ongoing product-level, and entity-level disclosures, targeted at institutional investors and consumers seeking more information.

Implementation dates

The introduction of SDR will be staggered as outlined below:

What does it mean for firms?

Morningstar estimates that, out of the estimated 1390 in-scope fund managers, there could be some 600 funds that will choose to use the four labels from 31 July 2024, with the appropriate disclosures. Although the four labels were deliberately created to be non-hierarchical, looking at existing funds, Sustainability Focus is expected to be the most popular label, followed by Sustainability Improvers.

Manufacturers have the option to produce a specific ‘ESG Factsheet’, separate from the forthcoming Consumer Composite Information framework, that would provide useful information, allow for informed investment choices to be made and add to consumer comprehension.

Irrespective of whether a firm wants to apply for sustainability investment labels or not, the SDR represents a regulation, within a principles-based regulatory environment, that aims to reduce greenwashing by FCA-regulated firms in the UK. By mixing Principles, Sourcebook regulation and guidance, in scope firms will have much to do to first interpret and then apply to ensure regulatory obligations are fulfilled.

For those funds manufactured outside of the UK but sold into the UK market, distributors of those funds will have to prominently declare to investors that the funds do not follow SDR.

What management should consider

All FCA-authorised firms need to prepare for the Anti-Greenwashing Rule if they make any sustainability claims about their products or services; or remove anything that would be misleading for consumers.

For UK asset managers, they should decide whether to label in-scope products and ensure investment processes, objectives and aims align. Or not label but comply with any disclosure requirements.

And importantly, at the end of the Value Chain, all distributors should prepare to make the labels and consumer-facing disclosures available and where relevant prepare a notice to consumers that overseas funds are not subject to the regime.