In its recently published consultation paper “Sustainability Disclosure Requirements (SDR) and Investment Labels”, the Financial Conduct Authority (FCA) is proposing a set of new measures designed to reduce greenwashing and improve consumer and investor confidence in products that claim sustainability.
The proposed rules include the introduction of three sustainable investment “labels” to be applied to products, disclosure requirements regarding product sustainability features, risks and opportunities, and rules limiting how terms related to sustainability can be used in product names and marketing.
Scope of greenwashing proposals
The FCA’s proposals will initially target UK-based investment fund managers, portfolio managers and distributors of relevant products (such as investment platforms) to retail investors. They are, however, meant to be the starting point for a regime that will expand and evolve over time.
The FCA recognizes that companies will need time to implement the new measures. Therefore, the rules on labelling, disclosure, distribution, naming and marketing will only come into force from June 30, 2024 and will have varying effects depending on the target market of the product in question (c i.e. retail, institutional, or professional investors).
However, the proposed general “anti-green money laundering” rule will take effect immediately after the publication of the final rules, no later than June 30, 2023. This rule clarifies that sustainability-related claims in all communications regarding products and services financial statements should be clear, fair and not misleading, and proportionate to the sustainability profile of the product or service in question. Significantly, this rule will apply to all FCA-regulated firms.
Proposals are to take effect through an amendment to the Environmental, Social and Governance Reference Manual, a relatively new addition to the FCA Handbook, which came into effect in January 2022.
Sustainable investment labels
In addition to establishing the general “anti-greenwashing” rule, the FCA proposes to institute a taxonomic regime for how sustainability is described, consisting of three distinct labels. There is no hierarchy between the labels and they are intended to distinguish different types of sustainable products. Each label is designed to encompass different asset profiles and consumer preferences.
Companies can choose whether or not to label their products. If companies use the labels, they must meet the qualification criteria offered by the FCA. For portfolio managers wishing to apply a label to a portfolio of assets, 90% of the total value of the products in the portfolio must meet the eligibility criteria for the applied label.
The three labels available are:
- “Sustainability Orientation”: Products bearing this label must meet a credible standard of environmental and/or social sustainability or align with a specified environmental and/or social sustainability theme.
- “Sustainable improvers”: these products aim to invest in assets that are not currently environmentally or socially sustainable, but which have been selected for their potential to become more environmentally and/or socially sustainable over time.
- “Sustainable impact”: these products must invest in assets that seek to provide solutions to environmental or social issues, with the explicit objective of making a positive and measurable contribution to sustainability outcomes.
This labeling regime could be compared to the system of traffic lights on food packaging. It will provide consumers of financial products with a relatively easy way to immediately know if a product is geared towards sustainability, and if so, in what way.
Appellation and marketing rules
Where companies choose not to use these labels or their products do not meet the criteria set out by the FCA, the FCA offers restrictions on the use of sustainability-related terms in these companies’ product names and marketing. . Under these restrictions, companies will be prohibited from using relevant terms, including (but not limited to) “Paris-aligned”, “net zero”, sustainable”, “sustainability”, “ESG” ( or “environmental”, “social” or “governance”), “SDGs” (referring to the Sustainable Development Goals), or even “climate”, “green”, “impact” or “responsible”, in the names and marketing perimeter products offered to retail investors in the UK The stated intention of the regulator is to ensure that consumers are protected against greenwashing.
For reasons of proportionality, the FCA clarifies that these rules will not apply.at this stage» products offered to institutional investors.
The FCA is also introducing new sustainability disclosure requirements which must be reviewed and updated at least annually.
The rules state that consumer information must provide a summary of the main sustainability-related characteristics of products, helping consumers to better understand these sustainability characteristics, to compare similar products or the same product over time and to keep the supplier responsible for its durability. complaints. Consumer disclosures will be required for covered products offered to retail investors whether or not a label is applied to the products (although disclosure requirements are lower for unlabeled products).
The FCA has sought to ensure that disclosures are clear and concise for consumers. They must be accessible in a digital format, must be provided to consumers on request and must not exceed two A4 pages when printed. Any “unexpected investment”, described as “a consumer may not generally associate with the sustainability goal”, must be identified.
Detailed information at the product level will provide more granular information, which would be aimed at sophisticated investors (such as institutional investors and a wider range of stakeholders). These will involve pre-contractual information detailing the sustainability-related features of an investment product, for example details in a UK-based fund’s prospectus about its sustainability objective and sustainability policy and strategy. investment. Pre-contractual information will be required both for labeled products and for non-labeled products for which sustainability is a central element of the investment strategy. In addition, from June 30, 2025 (provisionally), labeled products must continuously provide information on sustainability performance in a “Product Sustainability Report”.
Detailed information will also be required at entity level (i.e. investment firm level) for asset managers with at least £5 billion of assets under management ( “AT M”). This information will be mandatory whether or not a scoped company uses one of the sustainable investment labels, and it must cover governance, identification, assessment and management of risks and opportunities. related to sustainable development, as well as their real and real importance. potential impacts on businesses. The disclosures will be included in a “Sustainability Entity Report”, which will also be due (provisionally) from June 30, 2025 for companies with £50bn or more in assets under management. Product and entity reporting will build on existing disclosure requirements that are aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures.
The FCA had already made clear its intention to extend the new sustainability regime to include other UK investment products such as pensions, overseas products, financial advisers and other FCA regulated asset owners. , with separate consultation papers expected to be released in due course.
These detailed proposals nevertheless represent a clear signal from the FCA that the sustainability claims of regulated companies will come under increasing scrutiny in the future and that incorrect or misleading “green” claims by products will no longer be washed.
There remain some concerns about the extent to which the proposals preserve a degree of uncertainty where, for example, the FCA does not propose to commit to an objective standard of sustainability when applying the “sustainable orientationlabel. It’s also unclear how effective regulatory enforcement of the new regime will be: the proposed changes will bring a significant volume of additional products into the scope of FCA regulation, and the market for sustainable investments continues to grow exponentially, but there are no proposals to correspondingly increase the resources available to CAF as the primary law enforcement agency.
However, the steps to strengthen the regime are welcome, and the proposed new rules increase the potential for private enforcement related to greenwashing, with claims under Section 138D (for individuals) and the article 90 (relating to prospectuses) of the Financial Services and Markets. The 2000 law acquires a more solid base following the changes.