Sustainability Disclosure Requirements (SDR) and investment labels regime

Relevant Dates

• 31 May 2024 – the anti-greenwashing rules came into force
• 31 July 2024 – firms can begin using the investment labels, with accompanying disclosures
• 2 December 2024 – naming and marketing rules come into force for UK asset managers
• 2 December 2025 – ongoing product-level and entity-level disclosures for firms with AUM > £50bn
• 2 December 2026 – entity-level disclosure rules extended to firms with AUM > £5bn

Sustainable investment product labels and their relevant disclosures

In accordance with the new anti-greenwashing rule sustainability-related claims MUST be clear, fair and not misleading and proportionate to the sustainability of the product and service. Therefore, no more wild claims of something being “green” or “sustainable” when that is a far cry from the truth. The FCA’s new rules are an attempt to standardise the approach used by all investment firms when using sustainability information to describe funds. Whilst the FCA does focus a lot of the new requirements on consumers, they will also apply to institutional investors.

On 31 July 2024 firms that meet the qualifying criteria may begin using the new investment labels for their UK investment funds which are seeking to achieve positive sustainable outcomes.

What does this mean if you are a UK sustainable investment fund?

Where you have chosen to use one of the FCA labels the firm is responsible for ensuring that it is appropriate and has been classified correctly. Firms must notify the FCA via online application where it has used a label. For example, the FCA’s Fund Authorisation team may review a new fund application and may challenge this if it disagrees with the firm’s assessment and classification (but they will not approve labels, that is for the fund to determine). The FCA’s role here is one of supervision and enforcement if it feels the firm is failing to comply with the labelling requirements.

There are four voluntary labels which represent different types of investment objectives and approaches:

Sustainability Impact™

Sustainability Focus ™

Sustainability Improvers ™

Sustainability Mixed Goals ™

In order to use these any of the above labels (if you so choose) you must meet the general qualifying criteria applicable as well as the more specific label criteria.

The general criteria covers 5 key themes which can each be summarised as follows:

1. Sustainability objective: this must be included within the investment objective and includes positive environmental and/ or social outcomes;
2. Investment policy and strategy: at least 70% of the gross value of the product’s assets are invested in line with the sustainability objective;
3. KPIs: this is not prescriptive, but the sustainability objective must be measurable and so is necessary to be determined on a case by case basis;
4. Resources and governance: ensuring the appropriate resources, governance and organisational requirements are in place in order to assist with delivery of the sustainability objective; and
5. Stewardship: resources required to support the achievement of the product’s sustainability objective, including having an investor stewardship strategy in place.

Each of these criteria provide for the positive actions that firms must be carrying out in order to use the relevant labels, as well as the information that must be disclosed to investors with respect to the product.

It is important to note that the fund manager retains responsibility for compliance with the labelling rules, even where it may have delegated certain functions to a third party.

Specific criteria

There are specific criteria that must also be met in order to utilise these labels.

Sustainability Focus™ – to use this label, there is a requirement that a minimum of 70% of the assets the product invests in must be sustainable for the environment and/ or society now. The fund manager must also carry out an independent assessment to confirm the standard is fit for purpose.

Sustainability Improver™ – to use this label, the requirement is that the assets in which the fund invests are permitted to not be sustainable right now but must be on a path to improving their sustainability for the environment and/ or society over time (min. of 70% still applicable). It is important to have and to monitor short- and medium-term targets for meeting such standards. A stewardship strategy is important for this category to support delivery of the objectives and to improve on sustainability of assets over time. The KPIs must be relevant to the products sustainability objective.

Sustainability Impact™ – to use this label, the assets in which the fund invests must aim to directly pursue sustainability objectives which are consistent with an aim to achieve a pre-defined, positive and measurable impact in relation to an environmental and/ or social outcome (and invest at least 70% of their assets in accordance with that aim). The fund will be able to specify how the investment will achieve a positive impact and what needs to change to achieve that.

Sustainability Mixed Goals™ – this label should be used and applied where a mix of sustainability objectives and approaches is present in a product and at least 70% is being invested in accordance with the same.

Naming and marketing

If firms are using the product labels, then the relevant naming and marketing rules will apply now as well. Firms who have chosen not to use the product labels at this time do not have to adhere to the naming and marketing rules (and relevant disclosure rules) until 2 December 2024.

For example, when naming a product, you cannot use the terms ‘sustainable’, ‘sustainability’ or ‘impact’ unless a product label has been used (and the product qualifies for the label). Where a product label has not been used but the product has sustainability characteristics, the FCA has introduced requirements on the use of sustainability-related terms such as ‘green’, ‘climate’, ‘social’ etc. It is clarified in FCA guidance that the sustainability characteristics of a product should be material to that product (at a minimum 70% of its assets must have sustainable characteristics).

The accompanying disclosures

There are several key features of consumer-facing disclosure requirements for products where a label has been used:

• the disclosure must be clearly visible and not exceed two pages in length; and
• the disclosure must include information on:
  • The product’s sustainability objective and label being used
  • The investment policy and strategy
  • Relevant metrics
  • Links to further information on sustainability relevant to the investment
  • Where using the mixed goal label, details of the proportion of assets invested in accordance with each of the other relevant labels

Important take-aways

• Firms must be able to substantiate a claim that a product or service it is offering is sustainable. They need to be mindful that claims are fair, clear and not misleading at all times.
• For UK asset managers, if a product it is manufacturing meets the relevant qualifying criteria for positive sustainability claims, it should ensure that the product is labelled accordingly.
• Where a label has been used, firms must remember to notify the FCA via online application.
• Be aware of the requirements for use of labels, qualifying criteria, naming and marketing, disclosures etc. It will become second nature but is something that firms need to get to grips with early on in order to achieve the intended outcomes (e.g. minimising greenwashing and helping consumers navigate the market more effectively, with the ability to make informed decisions).