UK: FCA SDR investment labels and anti-greenwashing policy – what it means for insurance and pension providers

See our more detailed client note on the FCA policy statement here and the anti-greenwashing guidelines consultation here.

On 28 November, the FCA published its much-anticipated final rules and guidance on its sustainability disclosure requirements (SDR) and investment labels regime. In parallel with the FCA policy statement, the regulator has opened a consultation on anti-greenwashing guidelines which will sit alongside the new anti-greenwashing rule. 

These changes – which for the most part reflect the proposals the FCA has previously consulted on – will variously affect firms in the insurance and FCA-regulated pensions space. Here's a summary of what the new requirements mean. 

Anti-greenwashing – clearer expectations for all insurers and pension providers

The FCA is proceeding with the introduction of an anti-greenwashing rule – its scope largely the same as was consulted on. In short, the rule requires all FCA-authorised firms to ensure that any reference it makes to the sustainability characteristics of a financial products or services is:

• consistent with the sustainability characteristics of the product or service; and
• clear, fair and not misleading.

The FCA’s consultation will provide further clarity as to how firms can comply with this rule, which will now come into effect on 31 May 2024.

The rule will capture life and general insurers alike, as well as other FCA-regulated pension providers. The proposed guidelines make clear that firms will need to be especially careful when making substantive claims about a product or service’s sustainability characteristics – particularly where the firm may only be meeting a minimum level of compliance or its sustainability characteristics are otherwise negligible. 

The FCA gives the example of an insurer offering the UK’s Greenest Car Insurance, and insurers making such broad-brush claims will need to be clear on how it made such a determination and have evidence readily available to substantiate such claims. Similar principles would apply, for example, to firms providing green pensions or sustainable pensions; firms will need to properly diligence the validity of its claims, particularly when describing features of the product or service – e.g. environmental-based incentives in insurance such as pay-as-you-drive, the use of green endorsements in home insurance policies or the availability and prominence of ESG-related investment funds via the product. 

Labelling for investment products

Separately, front and centre of the SDR is the introduction of investment labels for UK funds that aim to improve or pursue positive outcomes for the environment and society – each of which represents different sustainability objectives, and in turn, different approaches to pursue those objectives. Unlike the EU’s equivalent SFDR regime, which by accident rather than design has been viewed as a de facto labelling regime and has an implicit hierarchy of “greenness”, the FCA has been at pains to emphasise that its regime has no hierarchy between the labels.

One of the main departures from the consultation has been the introduction of a fourth label – sustainability mixed goals. This label – which will sit alongside the other labels, has been introduced to accommodate multi-strategy products that wouldn’t otherwise align with the other three labels. 

Initially, the labelling regime will apply to asset managers in respect of, broadly speaking, authorised funds (including UCITS and AIFs). The FCA has indicated that it intends to consider extending the regime to pension products in the “medium term”; but in respect of pensions and other investment products (such as IBIPs, which will also initially be out of scope) has made clear that for now, having kicked the life and pensions can down the road:

• firms and products which are not in scope will not be able to use the investment labels;
• where out-of-scope products (e.g. pension products and IBIPs) invest in products that use a label (e.g. pension products which invest in either a labelled fund or a mirror fund of an authorised fund), firms will need to have the anti-greenwashing rule front of mind and ensure marketing materials about such products are clear, fair and not misleading. 

For pensions, default investment options (where the majority of members are typically invested) are already in scope of climate-related product-level reporting. The FCA’s prior consultation on the SDR indicated that the labelling regime would be most “decision-useful” at the level a member invests – which the FCA described as the level of pre-set strategies (i.e. a default arrangement). The FCA went on to indicate that the labelling and product-level disclosure obligations would then apply at the level of the constituent funds (of a default option), leaving the whole position somewhat uncertain. 

In any event, until there is further clarity on extending the regime to pension products themselves, the regime will be incidentally relevant to life insurers and other pension providers whose products facilitate direct or indirect access to in-scope investment funds (not least as it may help active, self-selecting members seek out funds to invest in which align with their sustainability preferences). 

Separately, insurers and pension providers will also need to consider the extent to which the requirements for distributors may apply. At a high level, distributors (which include platforms) must provide information on the labels and access to relevant sustainability disclosures to retail investors; prominent notices must also be included on overseas “recognised” products (including ETFs) to clarify that they are not subject to the UK sustainability labelling and disclosure requirements.  

Looking ahead

The FCA hasn’t set any date for moving forward on its proposals for pension products and IBIPs, in respect of which it is expected to engage with the DWP and TPR. However, clues may be provided in the consultation on extending the SDR regime to portfolio managers managing separate accounts early next year.