The new temporary measures will give firms more time to comply with the Sustainability Disclosure Requirements (SDR) and investment labels regime (PS23/16) published last year. See Sustainability disclosure and labelling regime announced by FCA.
The FCA explained its decision and said: “In recent weeks, we have been encouraged to see good progress made by firms to comply with the rules, and a strong pipeline of fund applications from firms wishing to use the labels. Through engagement with industry and their representative trade bodies, it has become clear it has taken longer than expected for some firms to make the required changes.”
“In particular, some firms wishing to use an investment label, or which need to change the names of their products, require more time to meet the higher standards and prepare the disclosures needed for our approval.”
“Given the importance of getting SDR right for investors, we are seeking to take a pragmatic and outcomes-based approach to provide further support to those firms which may need additional time to operationalise any changes required.”
Update welcomed
Daniella Woolf, founder of Danesmead ESG, welcomed the temporary reprieve and explained the industry’s view: “There has been a fair amount of feedback from the industry that the initial timeline for compliance with the naming and marketing rules was going to be a challenge.
“Certain funds with sustainability terms in their names will have had to adapt processes to meet the new label requirements, or indeed change their fund names.
“These processes take time and it’s a welcome update that the FCA has acknowledged this and provided additional time, supporting these firms to implement necessary changes and comply with the new regulations.”
Neil Robson, Financial Markets and Funds partner at Katten Muchin Rosenman UK LLP, said: “The FCA says that some firms are taking longer than the FCA had expected to be able to comply with the new rules and to make the necessary changes needed to be compliant – hence they’re giving firms until April to make all the changes needed.
“The naming and sustainability rules will require firms that have ESG-indicators within their name to actually follow the referenced requirements, so for example if a manager has a ‘sustainable investment fund’ it will need to ensure that the majority of the investments it invests in are actually sustainable; so to divest from some investments will take time, particularly where they are illiquid – hence the FCA time extension.”
Temporary flexibility explained
The FCA is offering limited temporary flexibility from September 9, until 5pm on April 2, 2025, for firms to comply with the “naming and marketing” rules (for example, ESG 4.3.2R to ESG 4.3.8R of the ESG sourcebook) in relation to a sustainability product which is a UK-authorized investment fund in exceptional circumstances where the firm:
- has submitted a completed application for approval of amended disclosures in line with ESG 5.3.2R for that fund by 5pm on October 1, 2024; and
- is currently using one or more of the terms “sustainable”, “sustainability” or “impact” (or a variation of those terms) in the name of that fund and is intending either to use a label, or to change the name of that fund.
These temporary measures do not apply to funds using other sustainability-related terms in their names that are not specified above, said the FCA.
Comply with rules as soon as you can
The regulator has also said where firms can comply with the rules, without requiring the flexibility period, they should do so as soon as they can without waiting until the April 2, 2025, cut off.
The “naming and marketing” and disclosure rules will come into force from December 2, 2024. They are broadly consistent with the pre-SDR guiding principles, which firms should be complying with already, said the FCA.
The FCA reminded firms to continue to comply with all other relevant rules, including the anti-greenwashing rule which took effect from May 31, 2024. See also FCA confirms new UK guidance to counter greenwashing.
Since July 31, 2024 managers of UK-based investment funds have been able to use investment labels on their products. The FCA also extended its SDR to portfolio managers, see FCA consultation on SDR and portfolio management as approach blooms.