On November 28, 2023, the UK's Financial Conduct Authority ("FCA") published its long-awaited final rules and guidance on Sustainability Disclosure Requirements ("SDR") and investment labels. According to the FCA, it intends for the new measures to improve trust and bring greater transparency to the market for sustainable investment products, including those claiming to have positive climate change mitigation or adaptation impacts.
The new measures, which are set out in the FCA's Policy Statement PS23/16, represent the culmination of a long period of consultation that began in October 2022. Annex 3 to PS23/16 contains a helpful table comparing the UK SDR requirements to the EU requirements set out in the EU Sustainable Finance Disclosure Regulation ("SFDR"). In addition to material technical differences between the regimes, the territorial scope of UK SDR is significantly narrower than EU SFDR, and does not, for example, apply to non-EU funds being marketed into the UK.
Some of the key measures being introduced by the FCA include:
- Anti-greenwashing rule: This is a blanket rule that prevents greenwashing and applies to all FCA-authorized firms. All communications about financial products or services which refer to environment and/or social characteristics must be consistent with the characteristics of the product as well as being clear, fair, and not misleading. The FCA's aim is to prevent authorized firms from making misleading or unclear sustainability-related claims. Further guidance on this rule is expected in the coming months before this rule comes into effect on May 31, 2024.
- Voluntary sustainability labels: This is a new
labeling regime, which introduces the following four new
sustainability labels:
- Sustainability Focus: For investments in assets that are environmentally and/or socially sustainable, determined using a robust evidence-based standard;
- Sustainability Improvers: For investments in assets that have the potential to improve environmental and/or social sustainability over time, determined using a robust evidence-based standard and supported by the Firm's stewardship strategy;
- Sustainability Impact: For investments that aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome; and
- Sustainability Mixed Goals: For investments with a sustainability objective to invest at least 70% in accordance with a combination of the sustainability objectives for the other three labels above. The proportion of assets invested in accordance with any combination of the other labels must be identified and disclosed.
To qualify for one of these four labels, a fund must meet the specific criteria for that label and demonstrate that the selected label applies to at least 70% of its assets. These labels will be available to UK Alternative Investment Funds ("AIFs") and UK Undertakings for Collective Investment in Transferable Securities ("UCITS") beginning July 31, 2024.
- Naming and marketing rule: This is a rule that regulates the use of ESG-related terms in product names and marketing documents to ensure they accurately reflect the product's sustainability characteristics. This will apply to all UK AIFs and UK UCITS and comes into effect on December 2, 2024.
- Product-level sustainability disclosures: Managers will be required to prepare pre-contractual and ongoing sustainability disclosures relating to UK AIFS and UK UCITS that are either labeled products or non-labeled products with ESG terms in their name or marketing. This will apply beginning July 31, 2024, for labeled products and December 2, 2024, for non-labeled products that use ESG terms.
- Entity-level sustainability disclosures: UK AIF managers and UK UCITS managers with UK assets under management ("AUM") of £5 billion or more will be required to provide a public disclosure regarding the approach taken to sustainability-related risks and opportunities. For managers with AUM of more than £50 billion, the first reports are due by December 2, 2025, and for those with AUM of £5 billion of more the first reports are due on December 2, 2026.
Next Steps
All FCA-authorized firms should familiarize themselves with the new anti-greenwashing rule and guidance (once published) if they make any claims relating to the sustainability characteristics of their products or services. Additionally, all UK asset managers should consider whether to adopt any of the four new voluntary sustainability labels if their products meet the qualifying criteria.
Enforcement
The FCA's usual supervisory and enforcement powers will apply to the SDR and the new investment labels. As such, failure to comply with the new rules could result in potential enforcement action, including suspension from undertaking regulated activities and/or financial penalties.
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