FCA Publishes Final Rules on Sustainability Disclosure Requirements and Investment Labels

On November 28, the FCA published its long-awaited policy statement (PS) on Sustainability Disclosure Requirements (SDR) and investment labels (PS23/16). The FCA’s aim in implementing this new regime is to inform and protect consumers, enhance competition and improve trust for sustainable investment products.

The PS was due to be published in Q2 2023 but was pushed to Q4 2023 due to the extensive amount of feedback received from stakeholders on the consultation paper (CP22/20) published in October 2022. The FCA also undertook further consumer research to inform its final package of measures.

Key Points from the Policy Statement

The FCA has made a number of changes to its original proposals, following feedback from the consultation. The key changes and highlights include the following:

• The introduction of a fourth investment label for funds that invest across different sustainability objectives, the “Sustainability Mixed Goals” label
• The introduction of a 70% threshold across all labels, which will require firms to have at least 70% of the gross value of the product’s assets invested in line with its sustainability objective
• The “credible standard” under the proposals that products with a label would have to meet has been replaced by “a robust, evidence-based standard that is an absolute measure of sustainability”
• Clarification that the independent assessment to confirm that the standard mentioned above is fit for purpose may be obtained from either internal processes (e.g. internal audit or compliance) or third parties, as long as it is independent from the investment process
• The removal of the term “sustainable” from the names of investment labels, replacing it with “sustainability” to reflect that some assets are on a journey
• The removal of portfolio management products and services from the scope of investment labels, as the proposals were deemed unworkable
• Amending the rules on naming and marketing to make them less restrictive
• Setting a new timeline for implementation of the new regime
• Consulting on guidance for the new anti-greenwashing rule (GC23/3)
• Clarification that overseas products are not captured by this new regime. The FCA will continue to work with His Majesty’s Treasury (HMT) on its approach toward overseas funds.

High-Level Overview of SDR and Labeling Regime

Scope

The rules on investment labels, disclosure and naming and marketing apply to UK FCA-regulated asset management firms with UK-domiciled products. Specific rules will apply to distributors of investment products to UK retail investors. The anti-greenwashing rules apply to all FCA-regulated firms who make sustainability-related claims about their products and services.

The new regime will not apply to overseas funds. However, the FCA states that it wants to ensure a level playing field and that firms marketing their products in the UK should be subject to the same broad requirements. The FCA says it will be working with the HMT to understand options for extending the regime to overseas funds.

Investment Labels

Firms can choose whether to use an investment label for products that are seeking to achieve positive sustainability outcomes if they meet the qualifying criteria. The FCA sets out general criteria that will apply to all labels, as well as specific criteria for each label, which will need to be satisfied before they can be used. The FCA is introducing four investment labels with sustainability objectives:

• Sustainability Focus: Must invest at least 70% in assets that are environmentally and/or socially sustainable, using a robust evidence-based standard that is an absolute measure of sustainability.
• Sustainability Improvers: Must invest at least 70% in assets that have the potential to improve environmental and/or social sustainability over time, identifying the period in which the product or its assets are expected to meet the standard, with short- and medium-term targets for improvements. Stewardship will be important in this category.
• Sustainability Impact: Must invest at least 70% in assets to achieve a pre-defined positive, measurable impact in relation to environmental and/or social outcome.
• Sustainability Mixed Goals: Must invest at least 70% in assets in accordance with a combination of the sustainability objectives of the other labels. Firms must identify and disclose the proportion of assets invested under each of the other labels.

It is worth noting that there are limited exceptions to the 70% threshold, for instance, when funds are in their ramping up phase.

Firms will need to notify the FCA before using a label using a new online FCA form, and they must use the FCA graphic when using labels, which they will be able to download as part of the notification process.

Naming and Marketing Requirement for Asset Managers

The FCA has introduced naming and marketing rules for products that do not use a label but do use sustainability-related terms in their names and marketing. These include the following:

• The product must have sustainability characteristics and its name must accurately reflect those characteristics (the FCA provides guidance that at least 70% of its assets should have sustainability characteristics—similar to the labeling regime).
• The terms “sustainable,” sustainability” and “impact” cannot be used. Labeled funds are restricted from using “impact” in the product name unless the product uses the Sustainability Impact label.
• The product must make the same disclosures as required for labeled products.
• A statement must be published in a prominent place on their website explaining why the product does not have a label and the reasons why.
• Feeder funds must only contain in their names terms which are consistent with those used by the master fund.

The FCA provides guidance on what firms should consider when naming products or issuing marketing material. The overriding consideration is that if firms continue to use sustainability-related terms in marketing material as allowed under the naming and marketing requirements, the anti-greenwashing rule must be satisfied.

Anti-Greenwashing Guidance

The anti-greenwashing rule requires all firms to ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service and is fair, clear and not misleading.

Alongside the PS, the FCA has published GC23/3 consulting on guidance on the application of the anti-greenwashing rule, which firms can respond to until January 26, 2024.

New Disclosure Requirements

Both consumer-facing disclosures and detailed product-level disclosures are required for labeled products and products using sustainability-related terms in their names and marketing.

Consumer-facing:

• The content of the consumer-facing disclosures must be reviewed at least annually and updated as appropriate.
• They must be available in a prominent place on the website or other digital medium.
• They must not exceed two pages.
• The required content is set out in the SDR, and the requirements vary depending on whether the product has a label or not, but may need to include, for instance:
  • Sustainability goal and label, if relevant
  • Sustainability approach
  • Relevant metrics

Detailed product-level:

• These are aimed at institutional investors and retail investors who may want more information.
• These will be both pre-contractual and ongoing disclosures.
• These disclosures are likely to be mainly static, but firms must keep them under review and update them when starting or ceasing to use a label.
• The required disclosures are set out in the SDR, and again, the requirements vary depending on whether the product has a label or not, but may need to include, for instance:
  • Product sustainability objective and label, if relevant
  • Investment policy and strategy
  • Relevant metrics
  • Information on investor stewardship and escalation plan

Entity-level disclosures:

• Will build on TCFD, requiring disclosures on governance, strategy, risk management and targets
• Firms can cross-reference disclosures made at the group level

The entity-level disclosures apply to all asset managers with an AUM above GBP 5 billion, regardless of whether they use a label or sustainability terms.

Distributors

Distributors must communicate the labels and provide access to consumer-facing disclosures to retail investors. They must make sure they keep them up to date with any changes made to the labels or disclosures.

Distributors must also include a notice on overseas products that are not subject to the UK sustainable investment labeling and disclosure requirements.

Access to the label and disclosures, as well as the notice on overseas products, must be in a prominent place on the relevant digital medium (usually the website) or use the communication channel the distributor would normally use.

Next Steps and How We Can Help

• All FCA authorized firms should prepare for the new anti-greenwashing rule if they make claims about the sustainability characteristics of their products or services, to ensure that they are fair, clear and not misleading. We encourage firms to read the FCA’s consultation on the proposed guidance and engage with the FCA if they have any comments.
• UK asset managers and distributors should familiarize themselves with the new requirements on SDR and investment labels to establish to what extent they apply and start to plan how they will comply with the new regime within the above timescales.
• UK asset managers should review their products and decide whether to label any products that aim to achieve positive sustainability outcomes, and if so, whether they meet the qualifying criteria. We suggest that those firms wanting to use labels from July 31, 2024, will have to start this work as soon as possible.
• Firms should also review their marketing material and fund names to assess whether they will be subject to the naming and marketing rules.
• We have a team of consultants who are closely following the developments in SDR and investment labels as well as other ESG-related regulations. If you would like to discuss the new SDR and investment label regime and any of the points raised above, please contact our compliance and regulation experts.