Publication alert: FCA - CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels
We communicate that the Financial Conduct Authority (FCA) has published a Consultation Paper (CP) 22/20 on Sustainability Disclosure Requirements (SDR) and investment labels.
1. Context
In October 2021, the UK Government published Greening Finance: A Roadmap to Sustainable Investing which set out plans for the FCA to introduce SDR rules for asset managers, certain FCA-regulated asset owners, listed issuers and financial advisers, as well as a labelling and classification system for investment products. As a first step towards FCA´s commitments in the Roadmap, the Discussion Paper (DP) 21/4 was published in November 2021 which sought feedback on a potential approach to classifying and labelling investment products based on sustainability characteristics, to help consumers better navigate the market for sustainable investment products.
In this context, the FCA has published the CP22/20 on Sustainability Disclosure Requirements (SDR) and investment labels which proposes the introduction of labels to help consumers (also referred to in this CP as retail investors) navigate the market for sustainable investment products, and ensuring that sustainability-related terms in the naming and marketing products are proportionate to the sustainability profile of the product. Additionally, the FCA proposes disclosure requirements, including accessible consumer-facing disclosures as well as more detailed product- and entity-level disclosures. Finally, this CP includes an ‘anti-greenwashing’ rule that would apply to all regulated firms, reiterating that sustainability-related claims must be clear, fair and not misleading.
2. Main points
Scope of application.
This CP will be of interest to all FCA-regulated firms, as FCA is proposing to introduce a general ‘anti-greenwashing’ rule that will apply to all firms.
The core elements of the regime (labelling and classification, disclosure and naming and marketing rules) are directed at investment funds (primarily those marketed to retail investors in the UK) and the firms that manage or distribute those products. However, FCA is seeking views on expanding the regime to FCA-regulated asset owners in respect of their investment products.
Sustainable investment labels. The FCA proposes to introduce classification and labelling of products to help consumers navigate a complex product landscape and give them confidence in the integrity of the sustainable investment products they are offered. The proposed regime distinguishes between three different types of sustainable products according to whether they aim to invest:
- in assets that are environmentally and/or socially sustainable (sustainable focus).
- to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of the firm (sustainable improvers).
- in solutions to environmental or social problems, to achieve positive, real-world impact (sustainable impact).
The labels will be underpinned by a set of clear, objective criteria that set a high bar for quality and integrity. These criteria cover specification of: i) an objective; ii) investment policy and strategy; iii) key performance indicators; iv) firm-level attributes and v) investor stewardship. Firms will need to decide if they want to apply sustainable investment labels to their products, and assess whether the products meet the proposed qualifying criteria. Any products that are not labelled must meet the proposed naming and marketing rules. Finally, firms may also choose to label products offered to institutional investors.
Consumer‑facing product‑level disclosures. The FCA proposes consumer-friendly, accessible disclosures to help consumers understand the key sustainability-related features of an investment product. This includes its sustainability objective, investment approach, and performance against the objective. These must be produced for products with or without a sustainable investment label, although disclosures will inherently be more limited for products that do not have a label.
More detailed disclosures at product and entity level. These additional, more granular proposed disclosures are targeted at a broader range of stakeholders, including institutional investors or retail investors seeking more information:
- Pre-contractual disclosures setting out the sustainability-related features of an investment product (e.g. its sustainability objective and investment policy and strategy). These are for products that use and don´t use labels.
- Ongoing sustainability-related performance information in a ‘sustainability product-level report’. These are for products that use labels.
- Entity-level disclosures, in a sustainability entity report on how firms are managing sustainability-related risks and opportunities. These disclosures must be made regardless of whether an in-scope firm uses a label.
Naming and marketing rules. These proposal includes a general ’anti-greenwashing’ rule clarifying that sustainability-related claims must be clear, fair and not misleading. The FCA also proposes to restrict the use of sustainability-related terms in the naming and marketing of products offered to retail investors that do not use a sustainable investment label.
Requirements for distributors. The FCA proposes requirements for distributors of in-scope investment products to retail investors in the UK to make the sustainable investment label and consumer-facing disclosures available to those investors.
3. Next steps
- The consultation paper is open until 25 January 2023. FCA will review feedback received and intend to set out the final rules in a Policy Statement (PS) by the end of the first half of 2023.
- The ‘anti-greenwashing’ rule would come into effect immediately on publishing the PS (provisionally, from 30 June 2023).
- The labelling, naming and marketing and initial disclosure requirements under this regime would not come into effect until at least 30 June 2024.
- The first ongoing sustainability performance-related disclosures must be published 24 months after publication of the PS (provisionally, from 30 June 2025) .
- Entity-level disclosures in the sustainability entity report will have a staggered implementation, with the largest firms producing their first disclosures 24 months after publication of the PS (provisionally, from 30 June 2025).
- The FCA intends to follow with a separate consultation in due course on how the proposals in this CP may be applied in respect of overseas fund.
- The FCA will also seek to expand the regimen in due course for other investment products marketed to retail investors in the UK, such as pension products.