28 November 2023

UK-SDR high level summary

FCA publish Sustainability Disclosure Regime (SDR) rules

At 2pm GMT this afternoon, the Financial Conduct Authority (FCA) published their official Policy Statement to address Sustainability Disclosure Requirements (SDR) and investment labels in the UK.

This was originally meant to appear around 6 months ago.

Here is an initial high-level summary of highlights (ahead of further detailed analysis).

1. Contents

Key content in the latest FCA document (212 pages) includes:

A synopsis of their final UK-SDR package, following on from the previous consultation last year;
An outline of the FCA’s Principles supporting their new SDR regime [Annex 1, p.91-97];
Details of FCA labelling regime, UK sustainability disclosures required in due course [Annex 2, p.98-121];
International compatibility section, including updated SDR / EU-SFDR mapping table [Annex 3, p.122-125];
Legal text ‘made rules’: including latest Glossary of definitions [p.137-212].

2. SDR rules, disclosures, deadlines

In summary, the FCA’s finalised SDR measures now address the following areas:

An anti-greenwashing rule: to apply from 31 May 2024;
Four UK ‘sustainability’ investment labels: to apply from 31 July 2024;
Naming & marketing rules for labelled products: to apply from 31 July 2024;
Consumer-facing disclosure for products using labels: to apply from 31 July 2024;
Pre-contractual disclosure for products using labels: to apply from 31 July 2024;
Distributor requirements: start to apply from 31 July 2024;
Naming & marketing rules for non-labelled ‘sustainable’ products: to apply from 2 December 2024;
Consumer-facing disclosures for non-labelled ‘sustainable’ products: apply from 2 December 2024;
Pre-contractual disclosure for non-labelled ‘sustainable’ products: to apply from 2 December 2024;
Ongoing product-level disclosure: begin to apply from 31 July 2025;
Entity-level disclosures [AUM > £50 bn]: to apply from 2 December 2025;
Entity-level disclosures [AUM > £5 bn]: to apply from 2 December 2026.

A more detailed summary of the FCA’s implementation timeline can be found on page 71.

3. Anti-greenwashing rule

Firms must ensure that any reference to a product’s sustainability characteristics are fair, clear and not misleading. The FCA have also published anti-greenwashing guidance, open for comment until 26 Jan 2024.

4. Labelling threshold, EU mapping

From next year, firms using any of the four UK investment labels are required to invest at least 70% of the gross value of the product in assets aligned with the respective product ‘sustainability’ objective:

Sustainability Impact: directly pursuing sustainability objectives;
Sustainability Focus: invest mostly in assets now considered sustainable for the environment / society;
Sustainability Improvers: invest mostly in assets on a path to improve their sustainability over time;
Sustainability Mixed Goals: a mix of the above objectives and approaches is present in a product.

The FCA also illustrate (p.124) how the UK labels map to SFDR product articles 8 and 9, along with the new product categories proposed by the European Commission in their current Level 1 consultation.

NB: a reminder that unlike the EU-SFDR, the UK-SDR regime is not (yet) based on a local ESG Taxonomy.

5. Product naming & marketing rules

The use of ‘sustainable’, ‘sustainability’ and ‘impact’ are restricted only for labelled products.

The names of other products (without a label) must have sustainability characteristics accurately reflected and be marketed in line with the anti-greenwashing rule.

6. Scope (at this stage)

The anti-greenwashing rule will apply to all FCA-authorised firms communicating with UK-based investors.

The FCA state their SDR investment labels, naming and marketing rules will apply only to UK asset managers. However, they “continue to engage” with the UK Treasury, who will decide the longer-term approach taken with the pending Overseas Funds Regime (OFR) to govern EU-UCITS products marketed in the UK.

7. SDR webpage for UK Consumers

To support their latest Policy Statement, the FCA has also created a new Consumer webpage.

‘Identifying sustainable investments’ explains some of their new SDR measures, including how to identify the new ‘sustainability’ fund labels that apply from 31 July 2024, while clarifying funds without any label.

NB: in this webspace, the FCA re-confirm that (for now, anyway): funds based outside the UK are not in scope of their labelling regime.