FCA Consultation: Sustainability Disclosure Requirements and Investment Labels

A summary of the FCA’s main proposals and what you need to know.

The Financial Conduct Authority (“FCA”) has published its Consultation Paper on the UK Sustainability Disclosure Requirements and investment labels regime which establishes a general ‘anti-greenwashing’ rule for all regulated firms to regain consumer trust in sustainable products. The targeted proposals listed below, however, are directed at investment funds (especially those marketed to UK retail investors) and firms that manage or distribute those products.

Sustainable investment labels

• The proposed regime distinguishes between three different types of sustainable product labels:

i. Products with an objective to maintain a high standard of sustainability in the profile of assets by investing to meet a credible standard of environmental and/or social sustainability (‘sustainable focus’).
ii. Products with an objective to deliver measurable improvements in the sustainability profile of assets over time (‘sustainable improvers’). The products are invested in assets that, while not currently environmentally or socially sustainable, they have the potential to be over time.
iii. Products with a specific objective to achieve positive and measurable contributions to help solve environmental or social problems (‘sustainable impact’).

• The proposed labels are mutually exclusive and there is no hierarchy between them.
• Each label will have a set of criteria which cover the specification of an objective, the investment policy and strategy, key performance indicators, firm-level attributes and investor stewardship.
• Firms need to decide if they want to apply sustainable labels to their products and assess whether the products meet the FCA’s qualifying criteria.

Consumer-facing disclosure

• This is a standalone disclosure requirement which aims to help consumers understand key sustainability-related features of a product by requiring firms to provide easily accessible information.
• Disclosure must include the firm’s product label, sustainability objective, investment strategy, the relevant metrics/KPIs linked to achieving the objective and any investments which a consumer may find inconsistent with the objective.
• This must be made for products with or without a sustainable investment label. For products that are not engaged in any sustainability-related strategies, the disclosure will be more limited.

Detailed disclosures for a broader range of stakeholders (such as institutional investors) 

• Pre-contractual disclosures set out the sustainability-related features of an investment product, including its sustainability objective, investment policy and strategy. This applies to products which use a label and for products that do not use a label but have sustainability-related features and the firm has specific policies in place for those features.
• For products that use a label, a sustainability product-level report setting out ongoing sustainability-related performance information (including performance indicators and metrics) is required.
• Entity-level disclosures detail how firms are managing sustainability-related risks and opportunities. More specifically, the disclosure covers sustainability-related topics that firms have prioritised in their governance, strategy, risk management and targets. Disclosure must be made regardless of whether a label is used. 

Naming and marketing rules 

• The Consultation proposes an ‘anti-greenwashing’ rule for all regulated firms by ensuring that sustainability-related claims are clear, fair and not misleading. This applies to firms that approve financial promotions for unauthorised persons. Such firms will need to ensure that the promotions comply with this rule as well as the financial promotions rules.
• If a product does not make use of one of the sustainable labels, it will need to meet certain naming and marketing requirements. Asset managers providing products to retail investors that do not qualify for one of the labels are prohibited from using sustainability-related terms in their product names and marketing.
• Such terms include (but are not limited to) ‘ESG’, ‘climate’, ‘impact’, ‘sustainable’, ‘green’ and ‘net zero’. 

Requirements for distributors 

• This regime ensures that distributors make available to relevant UK retail investors both the sustainable investment label (if applicable) and the consumer-facing disclosures. 

When will the rules come into effect? 

• The general anti-greenwashing requirement for all regulated firms will be effective on publication of the Policy Statement (provisionally 30 June 2023).
• Labelling, naming and marketing rules, consumer-facing and pre-contractual disclosure requirements and requirements for distributors will come into effect 12 months after publication of the Policy Statement (provisionally 30 June 2024).
• The first ongoing sustainability performance-related disclosures will likely need to be published 24 months after publication of the Policy Statement (provisionally 30 June 2025).
• The sustainability entity report will have a staggered implementation, with the largest firms producing their first disclosures 24 months after publication of the Policy Statement (provisionally 30 June 2025). 

To read the full Consultation Paper, please click here.