Following on from its consultation on sustainability disclosure requirements and investment labelling in October 2022, on 28 November 2023, the Financial Conduct Authority (the FCA) issued a policy statement setting out the details of the UK's sustainability disclosure and labelling regime.
The new Sustainability Disclosure Requirements coupled with the anti-greenwashing rule, the investment labelling regime and the naming and marketing rules are being introduced to support the UK's position as a world leading, competitive centre for asset management and sustainable investment and to protect customers by enabling them to make informed decisions when investing. So what are the changes which we will see in 2024 and who do they affect?
Anti-greenwashing rule
The anti-greenwashing rule will come into force from 31 May 2024. It will apply to all UK FCA authorised firms and is designed to ensure that all sustainability-related claims made by such firms are fair, clear and not misleading, and consistent with the sustainability profile of the product or service. Further guidance to help firms understand how best to comply with the new rule and to support implementation of it will be issued before the rule comes into effect.
Naming and marketing rules
The anti-greenwashing rule is the foundation for the new naming and marketing rules which will apply to UK asset managers from 2 December 2024. These rules are intended to assist retail investors in differentiating between products which have sustainability objectives and use one of the prescribed labels and those which have sustainability characteristics but do not use or qualify for a label.
Sustainability-related terms can only be used in a product's name and related marketing if a label is used (but if one of the labels is used, the word 'impact' must not be used in the product's name) or the product does not use a label but it complies with the product naming and marketing rules.
The naming and marketing rules have been introduced to limit the use of sustainability-related terms such as 'green', 'climate', 'social' and any other terms which imply that a product has sustainability characteristics as part of the FCA's efforts to combat greenwashing and to ensure that consumers are protected from related harm.
Products that do not use a label but use sustainability-related terms in their names and their marketing must have sustainability characteristics. A product's name must accurately reflect those characteristics however the terms 'sustainable', 'sustainability' and 'impact' (or other variations of those terms) cannot be used. The FCA also wants to ensure that consumers have consistent information across all products which use sustainability-related terms, so firms that are using sustainability-related terms in product names and marketing materials for products without a label must produce the same types of disclosures as for labelled products.
Firms can, however, continue to use the terms in marketing materials provided that the anti-greenwashing rule is met, relevant disclosures are made and a statement, in a prominent place on the platform where the product is offered, explains why the product doesn’t have a label.
Investment labelling regime
From 31 July 2024, provided the relevant qualifying criteria are met, UK asset managers can begin to use one of four prescribed labels for products which aim to achieve positive sustainability outcomes.
The 4 labels are Sustainability Impact, Sustainability Focus, Sustainability Improvers and Sustainability Mixed Goals and are intended to assist consumers who wish to invest in products that align with their personal preferences.
For one of these labels to be applied to a product it must meet both general and specific criteria relating to that label on an on-going basis. The general criteria which will apply to all labelled products fall within 5 themes: sustainability objective, investment policy and strategy, KPIs, resources and governance, and stewardship.
The specific criteria that apply will depend on the label which the asset manager wishes to apply and will include:
Sustainability Focus
Sustainable objective – To improve or pursue positive environmental and/or social outcomes by indirectly investing in assets with sustainability characteristics that meet a robust, evidence-based standard of sustainability.
Key features – The standard is required to be an absolute measure of environmental and/or social sustainability.
Sustainability Improvers
Sustainable objective – To improve or pursue positive environmental or social outcomes by indirectly investing in assets with sustainability characteristics that have the potential to meet a robust, evidence-based standard of sustainability.
Key features – Firms must obtain robust evidence that the assets which the fund invests in have the potential to improve environmental and/or social sustainability over time and identify the period of time over which the product and/or the assets are expected to meet the standard (including short ad medium-term targets).
Stewardship is also critical if using this label. Firms' investor stewardship strategy should support delivery of the objective and help accelerate improvements in environmental and/or social sustainability.
Sustainability Impact
Sustainable objective – To achieve a pre-defined positive, measurable, impact in relation to an environmental and/or social outcome.
Key features – Firms using this label must specify (i) a theory of change setting our how they expect their investment activities and the product's assets to contribute to positive impact and (ii) a robust method for measuring and demonstrating the positive impact of both their investment activities and the product's assets.
Products given this label must aim to directly achieve appositive impact so firms will also need to measure and report on how their investment activities contribute to achieving the impact as well as how the assets are achieving the impact.
Sustainability Mixed Goals
Sustainable objective – To invest in assets that meet or have the potential to meet a robust, evidence-based standard for sustainability, and/or invest with an aim to achieve positive impact.
Key features – Requirements for each of the other labels must be met. The proportion of assets invested in accordance with each of the other relevant labels must be identified and disclosed.
At least 70% of the value of the product's assets must be invested in line with the sustainability objective. Additionally, firms will need to meet specific requirements under the criteria and make associated disclosures as well as meeting the general requirements for publication, notification and review of the labels.
Disclosures must be reviewed and updated every 12 months and, among other things, asset managers must determine and disclose whether any material negative environmental and/or social outcomes may arise or have arisen in pursuing the sustainability objective.
Whilst the anti-greenwashing rule will apply to all UK FCA authorised firms when it comes into effect, the naming and marketing rules and the investment labelling regime will only apply to UK asset managers for the time being. Targeted rules are also being introduced for distributors of investment products to consumers in the UK. Firms with assets under management in excess of £50bn will need to comply with on-going product-level and entity-level disclosures from 2 December 2025 and the entity-level disclosure rules will be extended to firms with assets under management in excess of £5bn on 2 December 2026.
The FCA intends to consult on the wider application of the regime to portfolio managers during 2024 and proposals will be developed to bring pension products and insurance-based investment products within the scope of the regime over the medium term. Overseas firms are outside the scope of the regime although the FCA is working with His Majesty's Treasury on their approach to overseas funds.
