The Financial Conduct Authority (FCA) has published its long-awaited consultation paper CP22/20 on the sustainability disclosure requirements (SDR) regime and investment labels. This builds on its November 2021 discussion paper DP21/4 and is a key part of delivering the UK government’s roadmap to sustainable investing published in October 2021.
Whilst other aspects of the SDR regime are still in the works (notably those relating to general corporate disclosures and a green taxonomy), this consultation is aimed at similar considerations to the EU’s existing Sustainable Finance Disclosure Regulation (SFDR). This is because the overall intention is to try to address “greenwashing” in financial products and provide greater clarity to investors as to how sustainable the financial products they invest in actually are.
The FCA’s head of ESG, Sacha Sadan, has emphasised that greenwashing can erode trust in the market for sustainable investment and risk slowing down the flow of much-needed capital to the net zero transition and a more sustainable economy.
Key points to note from the FCA consultation paper
The proposed ‘anti-greenwashing’ rule (discussed below) applies to all regulated firms. However, the more specific proposals (e.g. classification, disclosure, naming, marketing and distribution) primarily impact investment funds (and primarily those marketed to retail investors) and the firms that manage or distribute those products.
Application to overseas funds –
The proposals focus on funds and portfolio management based in the UK, unless otherwise stated. Interestingly, these proposals do not cover overseas products that are marketed into the UK (unlike the EU’s SFDR and most other domestic ESG labelling regimes such as the French AMF doctrine).
However, overseas products will likely be indirectly impacted, as: (i) UK distributors / regulated firms, who will be subject to the general anti-greenwashing rule, will require an overseas fund – not compliant with the FCA’s SDR disclaimer to be added onto overseas funds; and (ii) manufacturers of these overseas funds may wish to advocate for voluntary compliance with the labels from a local demand or competitiveness perspective.
The FCA intends to follow up with separate consultations expanding the scope of the regime, including to overseas products and pension products.
Application to financial advisers –
The proposals do not place specific obligations on financial advisers (who will however be caught as distributors), but we are expecting a separate FCA consultation on specific rules for advisers.
Three tiered product labelling regime –
The proposed regime envisages three types of sustainable product (down from the five initially proposed in the 2021 discussion paper) according to their primary channel for contributing to positive sustainability outcomes. They are therefore classified according to whether they aim to invest:
- in assets that are environmentally and/or socially sustainable (“sustainable focus”);
- to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of the firm (“sustainable improvers”);
- in solutions to environmental or social problems, to achieve positive, real-world impact (“sustainable impact”).
ESG integration – i.e. strategies that simply consider ESG as part of the wider investment approach without any clear sustainability targets/KPIs – are not covered by the proposed three types of labels for sustainable products.
The FCA is keen to emphasise that there is no hierarchy between the three labels as they simply have different approaches that may be aimed at meeting different consumer preferences, in contrast to the EU’s SFDR which has an implicit hierarchy (with Article 9 products being seen as “greener” than Article 8 products). This is a helpful difference from the EU rules, as it gives equal recognition to investment products with a transitioning focus and recognises the importance of stewardship in driving the transition (in each case, under the “sustainable improvers” category).
As proposed in the 2021 discussion paper, the use of these labels will be voluntary (rather than mandatory) but any products that do not qualify for these labels will then be limited in terms of how they can be marketed or named from a UK perspective. Interestingly, there is no “do no significant harm” or principal adverse impact requirement embedded within the eligibility criteria for the labels (and the FCA has indicated that this was a policy choice, given they may be too restrictive at this stage) but there appear to be considerations of harm in some of the example products that the FCA has suggested would meet their labels.
Under the proposed regime, firms would be required to produce:
- Relatively simple consumer‑facing disclosures to help consumers understand the key sustainability-related features of a product. This deliverable is potentially similar to the summary website disclosure that firms must prepare under the EU’s SFDR for Article 8 and 9 products.
- Detailed disclosurestargeted at a wider audience (e.g. institutional investors and consumers seeking more information), which would include:
- pre‑contractual disclosures (e.g. in the fund prospectus), covering the sustainability-related features of investment products – again these are similar to the EU’s Article 8/9 pre-contractual disclosure obligations;
- ongoing sustainability‑related performance information including key sustainability-related performance indicators and metrics, in a sustainability product report again these are similar to the EU’s Article 8/9 periodic reporting obligations; and
- a sustainability entity report covering how firms are managing sustainability-related risks and opportunities – this obligation is similar to the EU’s SFDR Article 3 and 6 obligations on sustainability risk disclosures.
Naming and marketing rules– The proposals envisage restricting the use of certain sustainability-related terms (e.g. ESG, green, climate, etc) in product names and marketing materials unless the product uses a sustainable investment label. This rule builds on previous FCA guidance on this point, and is in line with guidance given by the EU authorities under SFDR and the US SEC proposals.
Requirements on distributors –
The proposed regime would require distributors to ensure that product-level information (including the labels) is made available to consumers. We note that, by contrast, the EU’s SFDR rules do not impose any obligations on distributors.
General ‘anti‑greenwashing’ rule – The proposed regime envisages this general rule to be applied to all regulated firms, which reiterates existing rules to clarify that sustainability-related claims must be clear, fair and not misleading (see here). This is a key proposal, and although the FCA will reason that this is just a clarification of their existing rules, it will likely require all FCA-regulated firms to revisit their approach to ESG and sustainability across all product types (not just investment products in scope of the SDR) and disclosures.
The consultation closes on 25 January 2023 and the FCA has said it intends to publish final rules by the end of the first half of 2023. [Postscript: In July 2023, the FCA published an update on the Regulatory Initiatives Grid to state that the publication of its policy statement has been pushed back to Q4 2023.]
The FCA is proposing for the general anti-greenwashing rule (which applies to all FCA-regulated firms) to come into effect as soon as its policy statement on these reforms is published but all the other reforms will have at least a one-year implementation period, taking effect from 30 June 2024 or thereafter.
For more information on the FCA consultation paper, see our client briefing.
Join us for a webinar on 2 November on greenwashing, where our ESG experts will discuss what regulators and stakeholders are challenging in various jurisdictions (including in Europe, the US and UK) and how you can guard against the risks. Click here to register.