The UK’s Financial Conduct Authority (FCA) has published its final rules on Sustainability Disclosure Requirements (SDR). This is widely seen as the UK’s answer to the EU’s Sustainable Finance Disclosure Regulation (SFDR), albeit different in scale and focus in some respects. A key difference with SDR in comparison with SFDR is the labelling regime for funds marketing as ‘sustainable’ (something the EU is said to be considering as part of its SFDR review).
Here are he key takeaways you need to be aware of:
1. Anti-greenwashing rule for all FCA authorised firms: Sustainability claims must be clear, fair and not misleading. Compliance deadline: 31 May 2024.
2. Naming and marketing rules if fund is available to retail investors: Unless the fund qualifies for and uses a sustainability label (see below), there will be restrictions on the usage sustainability related terms in product names and in financial promotions. Compliance deadline: 2 December 2024.
3. Voluntary labelling regime for UK managers of UK funds: available to funds that invest assets according with a sustainability objective. To achieve a sustainability label, certain requirements have to be met, including sustainability objectives and the ability to measure and report sustainability performance. There are four sustainable investment labels with cross-cutting and specific requirements:
- Sustainability Focus, which requires at least 70% of underlying assets to meet ‘credible’ sustainability criteria;
- Sustainability Improvers, which will classify funds who seek to improve the sustainability profile of assets over time (through stewardship and activism);
- Sustainability Impact, which are primarily driven by an objective to achieve a measurable positive environmental and/or social impact.
- Sustainability Mixed Goals, a category created to accommodate multi-asset/strategy funds which could have a mix of all three of the other three labels core approaches.
Labels available from 31 July 2024.
4. Product level sustainability disclosures:
Simplified consumer-facing disclosures for retail investors (for funds with sustainability label and funds without sustainability label but use ESG related terms in naming or marketing). Pre-contractual (‘Part A’) disclosures will need to be made in the fund prospectus, including the fund’s sustainability objective, investment policy and approach to stewardship. Deadline: from 31 July 2024 for labelled products; from 2 December 2024 for non-labelled products with ESG terms used in naming and marketing.
The fund will also have to make on-going sustainability product reports (‘Part B’) disclosures covering 12 month period, including the sustainability objective, progress towards it and KPIs to enable investors to assess sustainability performance and progress. Deadline: from 31 July 2025 (or 12 months from when sustainability label is first used and annually thereafter).
5. Entity-level sustainability disclosures: for firms managing £5bn or more , a public report on approach to sustainability risks and opportunities (building on TCFD) will be required. Deadline for managers with AUM greater than £50bn: first report due 2 December 2025; for other in-scope managers, the deadline for the first report is 2 December 2026.