FCA publish Sustainability Disclosure Requirements for fund managers and distributors
What’s new?
At the end of November 2023, FCA published the long-awaited Policy Statement (PS23/16) on new Sustainability Disclosure Requirements (SDR) and investments labels. The final rules were originally due to be published by June, however the “significant” level of responses (around 240) led to a delay in publishing the final rules.
Who does this impact?
The anti-greenwashing rule applies to all authorised firms.
The SDRs generally only apply to UK fund managers and only to their UK funds. The rules will not apply to non-UK AIFs managed by UK AIFMs.
Portfolio managers are not in scope, for now. FCA plan to consult on proposals for portfolio management, which are expected to follow a similar approach to that for fund managers, in early 2024.
The rules also do not currently apply to overseas funds managed by overseas firms that are marketed in the UK. The FCA is working with His Majesty’s Treasury (HMT) with respect to this, with the responsibility for a final decision on approach sitting with HMT.
At a glance
SDR is a package of measures aimed at improving the sustainability information consumers have access to, protecting against greenwashing and rebuilding trust in sustainable investment products as a result.
At a high-level, the measures consist of:
An opt-in labelling regime for sustainable products:
Firms can choose one of four labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals) which are intended to distinguish products based on the sustainability objective the product is seeking to achieve. The use of a label is subject to meeting general criteria in the following areas: sustainability objective, investment policy and strategy, KPIs, resources and governance and stewardship; as well specific criteria for each label.
Importantly, for all products that intend to use a label, at least 70% of value of the product’s assets must be invested in line with the sustainability objective.
Naming and marketing rules which apply when using sustainability-related terms in the name or marketing for products marketed to retail investors. Broadly, firms will only be permitted to use such terms provided certain conditions are met in relation to when and how they are used, including required disclosures and the necessary characteristics of the underlying products.
About 12 “Sustainability-related terms” are listed in the rules and includes terms such as ESG, sustainable, green, sustainable development goals (or SDGs), net-zero. However, any other term which implies the product has sustainability characteristics is also caught.
Particular care is needed around the use of the terms ‘impact’, ‘sustainable’ and ‘sustainability’, which are reserved for funds that meet the relevant criteria in the fund labelling regime (described above)
Consumer-facing product-level disclosures:
All products using labels or sustainability-related terms in their names and marketing must product consumer-facing disclosures. Labelled products (L) are subject to greater disclosure requirements than non-labelled products using sustainability-related terms (NL). There is no prescribed template but FCA have encouraged the industry to develop one which can be used voluntarily.
These documents must be short (no longer than 2 A4 pages), clear and concise. They must be reviewed every 12 months and kept up to date. For labelled products, this must include an annual update of progress towards the sustainability objective.
Detailed product-level disclosures for institutional investors or consumers who require more information.
All labelled products (L) and non-labelled products using sustainability-related terms in their names and marketing (NL) must prepare pre-contractual disclosures and ongoing disclosures. Pre-contractual disclosures will be made in the fund prospectus, prior disclosure document or sustainability product report (Part A). Ongoing disclosures will be made annually in a sustainability product report (Part B), which builds on the TCFD product report, or on-demand to eligible clients where public disclosure is not appropriate (i.e. in the case of unauthorised AIFs).
Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.
Firms which distribute L and NL products (including platforms and advisers) must ensure that all relevant SDR disclosures for those products are made available to retail investors. Distributors must also ensure the labels and disclosures are kept up-to-date in accordance with any changes the manufacturing firm makes to their products.
Distributors must also provide a notice on overseas products clarifying that they are not subject to the UK sustainability and labelling regime.
An anti-greenwashing rule for all FCA-authorised firms.
The rule will require that any sustainability-related claims in any communication (not just with retail investors) must be fair, clear and not misleading.
Supporting guidance (GC23/3) is being consulted on, with responses due by 26th January 2024. The guidance advises that firms ensure any sustainability references meet 4 key requirements i.e. that they are: (1) correct and capable of being substantiated (2) clear and presented in a way that is understandable (3) complete – important information should not be omitted or hidden and firms must considered the full lifecycle of the product or service and (4) fair and meaningful in relation to comparisons to other products or services.
Key dates
31 May 2024: All firms will be subject to the anti-greenwashing rule and guidance from this date.
31 July 2024: Labelling regime commences, allowing firms to use product labels which in turn triggers related disclosures.
2 Dec 2024: Firms with unlabelled products using sustainability-related terms must produce consumer-facing and pre-contractual disclosures.
31 July 2025: Earliest date firms using a label must publish its ongoing product disclosures (otherwise 12 months after the label is first used), where not provided on-demand.
2 Dec 2025: Earliest date firms using a label must provide on-demand product disclosures.
2 Dec 2025: Earliest date firms with unlabelled products using sustainability-related terms must produce ongoing product disclosures (otherwise 12 months after the terms are first used).
Next steps
If you are unsure on how the SDRs apply and any related requirements, please get in touch.
As a first step, we suggest that all firms carry out a review of their investor communication and marketing materials to assess compliance with the anti-greenwashing rule and to determine the extent to which the naming and marketing rules (in respect of sustainability-terms) will apply.