The UK FCA has confirmed a substantial package of measures to improve the trust and transparency of sustainable investment products and minimise greenwashing. It follows the consultation on Sustainability Disclosure Requirements (SDR) and investment labels (CP22/20), issued in October 2022.

With an estimated $18.4 trillion of ESG-orientated assets now being managed globally, a figure expected to increase to $34 trillion by 2026, the FCA is putting in place new SDRs and an investment labels regime after detailed engagement with a range of stakeholders, including industry, other regulators and consumer groups.

This package of measures, including the consumer-focused labelling regime and a new fourth “Mixed Goals” label, will support the UK’s position as a competitive centre for asset management and sustainable investment. It will also protect consumers by helping them to make more informed decisions when investing and enhance the credibility of the sustainable investment market.

Trust and growth

Sheldon Mills, Executive Director, Consumers and Competition at the FCA said, “the regime is built to build trust and support growth … and first and foremost protect consumers”.

The introduction of the fourth label has contributed to an increase in the estimated number of funds that will fall under SDR’s remit. The FCA has estimated 45% of funds will start using the sustainability investment labels, with the remaining 55% still subject to the naming and marketing rules.

At the press conference, Sacha Sadan, Director of Environmental, Social and Governance, FCA, said: “With new guidance in place then markets will improve”, leading to more funds working towards gaining sustainability investment labels. He also reminded firms that the 70% sustainability threshold was across all labels and the remaining 30% of the investments must “do no harm”.

“With new guidance in place then markets will improve.”

Sacha Sadan, Director of Environmental, Social and Governance, FCA

Hortense Bioy, Director of Sustainability Research at Morningstar said: “The Sustainability Mixed Goals label addresses the issue with multi-asset strategies that many market participants flagged. Effectively, this fourth label provides greater flexibility to product manufacturers and broadens the scope of eligibility. More products will now become eligible for a label.”

Phil Spyropoulos, Partner, Financial Services, Eversheds Sutherland said: “As anticipated, there are new restrictions on what firms can call their products and how they can describe them unless the firm opts in and adopts one of the FCA’s new sustainability labels. However, the FCA has heeded industry comment and included some additional flexibility.

“There are labels for portfolios whose sustainability profile is expected to improve, portfolios already meeting a level of sustainability, those expected to deliver a real world impact and those including a mix of strategies.”

Sustainability disclosure and labelling regime overview

Anti-greenwashing rule 

This is for all firms to make sure that any sustainability-related disclosures about their products and services claims are “fair, clear and not misleading”. This rule is currently under consultation.

Sustainability Investment Labels

The four investment labels apply to UK asset managers. They help investors understand what their money is being used for, based on clear sustainability goals and criteria. Products must meet the general and specific criteria relating to that label on an ongoing basis. Also, the labels are not designed to be in a hierarchy.

• Sustainability Impact: The sustainability objective must be consistent with an aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome. Firms must specify a theory of change setting out how they expect their investment activities and the product’s assets to achieve a positive impact. Firms must specify a robust method for measuring and demonstrating the positive impact of both the assets the product invests in and the firm’s investment activities.
• Sustainability Improvers: Applicable to funds investing in assets that have the potential to improve environmental and/or social sustainability over time. This is determined by their potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability. Firms will need to identify the period of time by which the product and/or its assets are expected to meet the standard, including short and medium-term targets. They must also obtain robust evidence to satisfy themselves that the assets have the potential to meet the standard.
• Sustainability Focus: The sustainability objective must be consistent with an aim to invest in assets that are environmentally and/or socially sustainable, determined using a robust, evidence-based standard that is an absolute measure of sustainability. A minimum of 70% of a Sustainability Focus product’s assets must meet that standard, and other assets must not be in conflict with the sustainability objective.
• Sustainability Mixed Goals: Applicable to funds investing across different sustainability – objectives will need to meet the requirements under the specific criteria for each of the other labels. The disclosures must include the proportion of assets invested in accordance with each of the relevant labels, and the information required in relation to those labels.

For all labels, independent assessment to confirm the standard is fit for purpose may be obtained via either internal processes or third parties, provided that the chosen method is independent from the manager’s investment process. KPIs can demonstrate progress of the product or individual assets towards the sustainability objective. Firms must have and carry out an escalation plan in cases where assets are not demonstrating sufficient progress towards the sustainability objective.

Naming and marketing requirements 

The naming and marketing requirements apply to UK asset asset managers. “Products cannot be described as having a positive impact on sustainability when they don’t”, said the FCA. Examples of information to which the rules apply:

• Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product
• Detailed information in pre-contractual, ongoing product-level, and entity-level disclosures, targeted at institutional investors and consumers seeking more information
• Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

Sacha Sadan said: “We’re putting in place a simple, easy-to-understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity. By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment.”

“Products cannot be described as having a positive impact on sustainability when they don’t.”

FCA

The package of measures has consumers at its heart and was tested with over 15,000 people. It also follows the FCA’s Financial Lives survey, which highlighted that a significant majority of adults in the UK would like to invest in a way that protects the environment and has a positive social impact, 76% would like to invest in a way that protects the environment, and 74% would like to invest in a way that has a positive social impact.

Spyropoulos said: “Inevitably, after receiving 200+ responses, the FCA has made some meaningful changes to its previous proposals. This is the culmination of years of policy work on the FCA’s part and firms have been really eager to see the final form of the rules. In many cases products have been held back waiting for this.”

On the implementation timetable starting next year, he added: “Notwithstanding the changes to the timeline, the window for implementation is fairly short. Leading funds could start using the new labels from July 31, which is actually sooner than the 12 months many were expecting.”

International alignment

The ISSB launched its first sustainability-related reporting standards in June 2023. The FCA refers to the ISSB’s Sustainability Disclosure Standard (IFRS S1) as a helpful reference point for asset managers in scope of these rules and guidance to determine the content of their entity-level disclosures.

The FCA intends to consult in 2024 on updating the Taskforce on Climate-Related Financial Disclosures’ (TCFD) aligned disclosure rules for listed companies to reference the ISSB’s standards. The ISSB’s global baseline standards will provide the internationally consistent and comparable sustainability disclosures that asset managers need to support their decision-making and to support the flow of information for their own disclosure requirements.

The FCA has taken account of other international initiatives, such as the Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management, published by IOSCO in November 2021. In a major step towards consistent, comparable and reliable sustainability information, IOSCO announced in July that it has decided to endorse the sustainability-related financial disclosures standards, issued by ISSB, IFRS S1 and IFRS S2.

Implementation timetable

• May 31, 2024: Anti-greenwashing rule and guidance comes into force
• July 31, 2024: Firms can begin to use labels, with accompanying disclosures
• December 2, 2024: Naming and marketing rules come into force, with accompanying disclosures
• December 2, 2025: Ongoing product-level and entity-level disclosures for firms with AUM > £50 billion ($63 billion)
• December 2, 2026: Entity-level disclosure rules extended to firms with AUM > £5 billion ($6.3 billion)