A couple of weeks later than anticipated, but as promised, the FCA has published its guidance page setting out its thoughts on how firms should consider the UK sustainability disclosure and labelling regime and, where relevant, take steps ahead of the rules coming into effect. It also provides some clarification around some common implementation questions the FCA has received, including the process for using a label, the application of the naming and marketing rules, and some general guidance around the selection of assets against a “robust evidence-based standard”.
The guidance page will be updated to provide further clarification to firms on common queries - no specific timeframe for this is provided, so we expect the FCA intend to do so on an hoc basis.
A helpful infographic confirms the dates that the rules and guidance come into force. Despite hopes that the fast approaching date for the Anti-greenwashing rules and guidance might be pushed back, there is no indication at this stage that the FCA intends to make this concession.
What should firms be doing now?
The FCA sets out a non-exhaustive list of the steps firms should be taking now to prepare for the regime coming into effect. None of these expectations will come as any surprise to those familiar with the rules. Of particular note for distributors, the FCA reiterates the need to prepare to make the labels and consumer-facing disclosures available as soon as reasonably practicable to retail investors, and to keep them up to date following changes made by the firm.
Summary of key clarifications
Naming and Marketing:
- Scope – the FCA clarifies that firms using sustainability-related terms only need to meet the additional naming and marketing requirements (including on product naming and producing the associated disclosures and statement) in respect of products for retail clients.
- Exceptions - Firms can use sustainability-related terms in other contexts where not referring to sustainability characteristics, for example ‘economic climate’ or ‘financial impact’. The FCA clarifies that another exception is where a firm is only making short, factual, non-promotional statements, for example a statement that it carries out ESG integration on the product as part of its usual risk management process. However, if, for example, ESG integration or another sustainability-related investment approach is being promoted in its marketing as material to the product, the firm will be required to produce a disclosure and statement to clarify why the product doesn’t have a label. Whilst the naming and marketing rules are focused on the use of sustainability-related terms in financial promotions relating to the sustainability characteristics of a particular product, other materials produced by firms that include sustainability references are nevertheless likely to be captured by the anti-greenwashing rule.
Process to use a label - If a firm is updating its pre-contractual disclosures to use a label or to meet naming and marketing rules, for example, if amending the investment objective, it will need to submit these updates to the FCA before starting to use the label, or before the naming and marketing rules take effect. The FCA will not be approving use of the label - but may need to approve changes to pre-contractual disclosures as a result of the firm’s decision to use the label (with firms responsible for making their assessment against the criteria for a label). Firms subject to the FCA COLL Sourcebook are reminded to consider their pre- event notification obligations if making changes to an existing product.
Displaying a label – for firms using a label, the relevant graphic will be accessible from the FCA’s online notification form (details to follow from the FCA in shortly on the form)
Fund of Funds - the rules do not set out any specific requirements for a ‘fund of funds’. Where a fund in scope of the regime invests in other funds, those funds will be treated as ‘assets’. The rules apply as usual to the authorised fund, so the the firm is responsible for ensuring the labelling criteria for the fund of funds is met and must make the associated disclosures or comply with the naming and marketing requirements.
“Robust evidence based standard” - as regards the selection of assets for a product using a sustainability label, the FCA is not being prescriptive around how certain assets should be treated. If firms determine that sovereign bonds, derivatives, or other assets, meet or have the potential to meet a robust, evidence-based standard of sustainability they can be in the part of the product that pursues the sustainability objective. Otherwise, they can still be included in the product provided that the firm discloses the type of asset held and why. The FCA reiterates the ESG 4.2.4(2)(b) rule that the robust evidence-based standard must be an absolute measure of environmental or social sustainability, but doesn't provide any further guidance on the point, although there is a reminder that (as set out in the policy statement) for the Sustainability Improvers label, the methodology or approach to select assets may be a relative measure or approach eg, selecting the ‘best-in-class’ for a particular sector.