Guidance has been emerging, and the FCA has recently provided examples of how applicants can meet pre-contractual disclosure requirements
Investor priorities are rapidly changing according to the latest research by the Financial Conduct Authority (“FCA”): now over 80% of consumers want their money to “do good” as well as deliver a return. Transitioning to a sustainable future is not only underpinned by various pieces of legislation, such as the EU’s corporate sustainability directives, but a genuine market demand towards investments with positive environmental and social impacts.
However, whilst consumers are raising the bar on investments products through strong sustainability preferences, it is not always easy to access clear information about responsible asset management and sustainable finance, which is further confused by misleading claims, various acronyms and a general lack of standardisation.
What are the SDRs?
The Sustainability Disclosure Requirements (“SDR”) framework builds on global best practices to support the UK financial services market and endorses the International Sustainability Standards Board (“ISSB”) baseline standards. UK-listed companies will be required to report on sustainability-related information in line with the FCA’s SDR and investment labels regime for funds based in the UK.
Furthermore, the SDR regime introduces additional mechanisms requiring firms to follow the FCA’s qualifying criteria in relation to the marketing and naming of sustainable products. All FCA authorised firms must ensure that sustainability-related claims are fair, clear and not misleading in accordance with robust anti-greenwashing rules. Investment labels must also protect consumers by equipping them with information to navigate the financial services market, thus promoting transparency across the board and likely increasing competition among comparable products.
The SDR released its policy statement (PS23/16) confirming the four investment labels as follows:
- Sustainability Mixed Goals
- Sustainability Improvers
- Sustainability Impact
- Sustainability Focus
The labels can be now used since July 2024, provided the FCA has been notified, and rules came into force on 2 December 2024. The labelling regime follows from the anti-greenwashing rule applicable to all FCA-authorised firms, which reinforces the marketing requirements for investment products and regulates the use of sustainability-related references, including statements and images.
How can companies ensure compliance with the SDR regime?
The FCA Handbook includes a section dedicated to ESG setting out rules and guidance concerning an FCA-regulated firm’s approach to ESG matters. ESG 4 defines the term “sustainability product” in relation to authorised funds that make particular investments. The FCA encourages the use of its sustainability labels broadly defined as funds which have an “explicit sustainability objective as part of its investment objectives”, and that objective must be “clear, specific and measurable”. Furthermore, sustainability products must invest at least 70% of the gross value of the product’s assets in accordance with its sustainability objective, which must have “the aim of directly or indirectly improving or pursuing positive environmental and/or social outcomes.”
Specific guidance has been slowly emerging, and the FCA has recently provided examples of how applicants can meet pre-contractual disclosure requirements on its webpage. Nevertheless, the uptake has been relatively slow given this prescriptive approach, and the limited guidance has left companies open to increased risk of greenwashing. Certain investment managers may simply decide to rename funds and remove sustainability-related terms to lower the risk of non-compliance. However, given the consumer demands for ethical investments, it is anticipated that we will be seeing more labelled funds as time goes on.
Regional frameworks such as the European Securities and Markets Authority’s (ESMA) has published guidelines on labelling funds using ‘ESG’ or sustainability-related terms such as ‘transition’, ‘social’ and ‘green’, which offers slightly more robust criteria. Furthermore, as the SDR regime is based on the International Sustainability Standards Board (ISSB) standards, guidance in relation to IFRS S1 and S2 could be used to support implementation of SDR products. The FCA has indeed noted its commitment to implement rules coherent with international frameworks to facilitate a consistent compliance process.
How can we help?
Our team of expert ESG lawyers can advise on developing proportionate and sustainability-related investment strategies and provide assurances to prevent greenwashing. We can review your current product labelling and incorporate a policy to assist with disclosures. We work with key partners including Paragon Impact who can assist implementing a tech-driven sustainability strategy with tools specifically designed to incorporate the SDRs and, Stories Evolved who offer bespoke training on all things ESG.
If you would like to understand more about how the SDRs will affect your business and commence preparation for its requirements, contact Abhay Srivastava, Simon Colvin, Aidan Thomson or Nick Barker.
