Introduction
At the end of last month (November 2023), the FCA published its Policy Statement 23/16: Sustainability Disclosure Requirements (SDR) and investment labels, which contained an initial package of measures to help consumers navigate the market for sustainable investment products. This policy statement followed on from a consultation in 2022 (CP22/20).
There are three parts to this new policy:
• Investment labels, disclosure and naming and marketing rules, which will apply to UK asset managers from 31st July 2024.
• An anti-greenwashing rule which, from 31st May 2024, will apply to all FCA-authorised firms who make sustainability-related claims about a product or service.
• Sustainability rules for distributors of investment products to retail investors in the UK, applicable from December 2024.
The FCA’s stated aim for the investment label and disclosure regime is that “financial products that are marketed as sustainable should do as they claim and have the evidence to back it up.” The FCA also believes that the new regime will help underpin the UK’s position as a world-leading competitive centre for asset management and sustainable finance.
Investment Labels
The 2022 consultation proposed three non-hierarchical mutually exclusive investment labels: sustainable focus; sustainable improvers; and sustainable impact; but probably the most significant change from the consultation was the introduction of a fourth investment label, sustainability mixed goals, which will allow managers to blend all three strategies within a single fund. If a firm chooses to label a product, it will remain responsible for its classification and ensuring that the label is appropriate, but the FCA’s Fund Authorisation team will review
and may challenge, but not approve, labels for new authorised funds or amendments to existing funds.
Each fund using a label must invest at least 70% of its assets in accordance with its sustainability objective and must identify KPIs to measure progress against this objective. The FCA has clarified that funds of funds can treat the underlying funds as assets with (or without) sustainability criteria, depending on whether they have a label or not.
Unlike the consultation proposal, the new rules will not yet apply to portfolio management products and services. The consultation feedback suggested that there were industry concerns that the proposed rules did not allow for directly invested sustainable portfolios or for those that invested in non-UK funds, which by implication meant that such portfolios could never be marketed as sustainable. Therefore, the new regime will initially apply only to funds, including alternative investment funds and investment trusts. The FCA intends to consult on the appropriate regime for portfolio managers early in 2024.
In addition to this work on portfolio management, the FCA will also be undertaking further scoping, including pensions and non-UK funds.
Naming and Marketing Rules
Those fund management firms distributing their funds to retail investors will be able to use sustainability-related terms in their product names and marketing literature only if, either the fund has a label, or they comply with new sustainability naming and marketing rules for investment products. The FCA’s aim is to ensure the use of any sustainability-related terms is accurate. This is an important improvement from the consultation paper, where only funds with one of the three investment labels could use sustainability-related terms.
Sustainability Disclosures
The new rules on sustainability disclosures will cover:
• Retail investor-facing product-level information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product.
• Detailed product-level information targeted at institutional investors and retail investors seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures.
• Annual ongoing product-level disclosures.
• Entity-level disclosures, which will apply to all asset managers with AUM above £5bn, regardless of whether or not they use a label or sustainability terms.
The pre-contractual and ongoing product-level disclosures will also apply to products not using a label, and these must, at a minimum, include information relating to the investment policy and strategy and any relevant metrics.
Anti-Greenwashing
The anti-greenwashing rule applies to all FCA-authorised firms and to all communications about financial products or services which refer to the environmental and/or sustainability characteristics of those products or services. Sustainability-related references can appear in statements, assertions, strategies, targets, policies, information, and images.
The anti-greenwashing rule says that a firm must ensure that any reference to the sustainability characteristics of a product or service is (a) consistent with the sustainability characteristics of the product or service; and (b) fair, clear and not misleading.
Additionally, the FCA has started a consultation on anti-greenwashing guidance to support the implementation of this new rule.
Distributors
Finally, distributors will be required to communicate the investment labels and provide access to consumer-facing disclosures to retail investors.
Conclusion
When the FCA originally released CP22/20, its aim was to make the final rules by the end of June 2023. However, some of the detailed feedback received caused the FCA to rethink some of the practicalities of the more detailed rules. PS 23/16 has addressed much of this feedback, with either an amendment to the proposed rules (e.g. the introduction of a fourth blended investment label or the broader naming and marketing rules), or a deferral of its policy decisions (e.g. regarding portfolio management). Most of the outstanding questions left over from the consultation have been answered, and the industry will welcome this response from the FCA, but there remains significant work to be done by firms’ investment and product teams to implement these rules.