In recent years, a pronounced surge in investor enthusiasm for sustainable investments has emerged, particularly among consumers and retail investors. These individuals aspire to leverage their financial clout to champion environmental protection and foster positive social impacts.
However, the financial services sector's provision of investment products has often fallen short of aligning with investors' sustainability preferences. The FCA has identified key challenges, including a lack of standardised accessible information and the pervasive use of jargon, along with unclear and interchangeable terms, hindering investors' analysis and decision-making.
After extensive consultations with industry stakeholders, consumer groups, and other concerned parties over the past couple of years, the FCA is now introducing a comprehensive set of measures. These initiatives are designed to empower and safeguard consumers, fostering trust in the market for sustainable investments. The overarching goal is to fortify the UK's standing as a global leader in asset management and sustainable finance.
In this article from Martin Weir, Senior Compliance Consultant at Newgate Compliance, an Ocorian company, explores the intricacies of the SDR reform.
What is the scope of the sustainability disclosure requirements?
All FCA firms are bound by anti-greenwashing rules, with specific implications for FCA-regulated asset managers.
The scope includes UK AIFMs, Small authorised UK AIFMs, and Authorised Corporate Directors/Authorised Fund Managers of UCITS, ACS, and AUTs managing authorised funds, investment trust companies, and unauthorised UK AIFs.
What are the anti-greenwashing rules?
The FCA is introducing an anti-greenwashing rule in the ESG Sourcebook for FCA-authorised firms, emphasising fair, clear, and non-misleading sustainability claims.
Consultation on supporting guidance is ongoing until January 26, 2024, with the rule effective for all FCA-regulated firms on May 31, 2024.
In respect to SDR, what label categories can we expect to be included?
The FCA, after industry feedback, proposes four sustainability labels:
- Sustainability impact
- Sustainability focus
- Sustainability improvers
- Sustainability mixed goals (newly added)
All labels must meet a minimum threshold of 70%, ensuring robust evidence-based standards for sustainability.
What are the naming & marketing rules included in the SDR?
Revised rules permit the use of FCA-identified sustainability terms in product names and marketing for non-labelled products with sustainability characteristics.
Effective December 2, 2024, these rules provide clarity on term use for labelled and non-labelled funds, preventing potential investor misunderstandings.
What are the product-level disclosure requirements?
Products, labelled or using sustainability-related terms, must disclose sustainability information in pre-contractual and annual product-level disclosures.
For the 'Sustainability Mixed Goals' label, disclosures must detail the proportion of assets in alignment with each relevant label, effective December 2, 2025.
What are the entity-level disclosure requirements for asset management firms regarding sustainability?
Asset management firms, regardless of using sustainability labels, must annually disclose governance, strategy, risk management, and metrics in a sustainability entity report, referencing relevant standards.
For firms with over £5 billion AUM, these rules start from December 2, 2025, while those with AUM between £5 billion and £50 billion adhere to them from December 2, 2026. Firms with less than £5 billion AUM are exempt from entity-level disclosures.
What responsibilities do distributors have in communicating labels and consumer-facing disclosures for sustainable investment products?
Distributors are obligated to share labels and disclosures with retail investors via relevant digital mediums or usual communication channels. They must keep these up-to-date with any changes and prominently display a notice on overseas products clarifying their exemption from UK sustainable investment requirements. This notice, along with a link to the FCA webpage, should be in place by December 2, 2024.
How can Newgate Compliance help?
At Newgate Compliance, we help manage your regulatory, compliance and legal obligations, providing you with certainty and peace of mind.
We assist with a broad range of compliance services such as submission of regulatory authorisation applications, provision of Money Laundering Reporting Officers (MLROs), the implementation of compliance frameworks and governance structures, as well as regulatory and compliance training for employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.