PS23/16: Sustainability Disclosure Requirements (SDR) and investment labels

The Financial Conduct Authority (FCA) has published a new policy statement (PS23/16) on the disclosure requirements and labeling of sustainability-related investment products, including investment fund shares. The Policy Statement follows a corresponding consultation in 2022 (EventID 17994) aims to help investors navigate the ESG product jungle in an effort to make well informed investment decisions and to prevent greenwashing in the financial market. Specifically, the Policy Statement introduces
– an anti-greenwashing rule to require sustainability-related claims to be „fair, clear and not misleading“;
– various product labels that investors can use to easily identify the ESG alignment and component of the investment product;
– sustainability-related naming and marketing requirements so as to ensure that products live up to their indicated ESG objectives and that investors are clearly informed of the sustainability of a product; and
– specific disclosure requirements to enhance transparency over sustainability-related products.
Concurrent to the publication of this Policy Statement, the FCA has also launched a new consultation on proposed guidance for compliance with the anti-greenwashing rule. Please refer to EventID 24132 in this context for more information.
—
#### The anti-greenwashing rule
The FCA will proceed as proposed and require that all sustainability-related claims be „fair, clear and not misleading“ and consistent with the sustainability characteristics of the product or service. This requirement will apply from May 31, 2024. In view of the responses received by respondents which primarily sought clarity on what is to be considered „fair, clear and not misleading“ in relation to ESG products and services and how this requirement relates to the sustainability-related terms in the naming and marketing rules for asset managers, the FCA has launched the beforementioned consultation.
#### Product labels
In its consultation, the FCA proposed to introduce three product labels to clearly indicate the sustainability of a product or service. The labels are / were to be assigned based on the intention of the product and the channel via which the sustainability objective is to be reached. The proposed labels included:
1. Sustainable focus, including assets that are environmentally and/or socially sustainable;
2. Sustainable improvers, including assets whose sustainability is expected to improve over time (e.g. via stewardship influence);
3. Sustainable impact, including assets with an explicit objective to achieve a positive, measurable contribution to „real world“ issues affecting people „or the planet“.
In view of the responses received by respondents, the FCA will introduce a fourth label, namely the „Sustainability mixed goals“. This category must be used for investment products that meet ALL of the above noted sustainability label criteria as requested by investment fund managers whose funds invest in assets with various objectives.
#### Product label qualification criteria
The FCA requested investment products to meet various criteria for any of the noted product labels to be used. The Authority thereby proposed restrictions as to the sustainability objective, the investment policy and strategy, the use of KPIs to measure progress against the sustainability objective, the availability of resources and governance policies to foster the sustainability objective, and the existence of adequate stewardship principles. Most notably, the FCA proposed products to include at least 70% of assets (of NAV) meeting a „credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme“ for the product label „sustainable focus“ to be used.
In response to feedback received, the FCA will now require ALL products receiving a sustainability label to meet the 70% threshold. The remaining criteria more or less remained the same, with some clarifications and removal of detailed rules (e.g. specification of expectations relating to appropriate skills and experience) to take a more proportionate and real live approach towards the new requirements.
#### Sustainability-related naming and marketing requirements
In its consultation, the FCA proposed strict limits on the use of ESG-related terminology in an investment product name such that only products with sustainability characteristics may use terms such as „sustainable“, „sustainability“, or „impact“, or any combination thereof. The FCA thereby suggested that such terms may only be used in connection with products that receive a fund label as discussed above. Having reviewed the feedback from commenters, the FCA will allow the use of sustainability-related terms for non-labelled products so long as the product meets the anti-greenwashing rule, has a clear sustainability objective, and produces the same types of disclosures as required for a labelled product (see below). Nevertheless, firms promoting non-labelled sustainable products must publish a statement as to why no label is used.
The FCA also notes that in „the case of a feeder fund, the product must only include in its name terms which are consistent with those used by the relevant master fund and the asset manager must provide clients with easy access to the disclosures […], and produce the relevant statement“.
#### Sustainability-related disclosures
In its consultation, the FCA proposed to require firms to produce a new stand-alone document for labelled products to be made available to investors via public disclosure or in hard copy form upon request. This document should include
– information on the product’s sustainability objectives;
– information on the investment policy and strategy underlying the product;
– details on permissible and non-permissible investments;
– relevant metrics supporting the sustainability claims; and
– information on where consumers can access additional sustainability and non-sustainability-related data.
Furthermore, the document would have to be at least annually reviewed and updated, if so needed.
In view of the above noted changes, the FCA has made some adjustments to this requirement: Firms offering ESG-related products that have not received a label will have to produce this document as well. Additionally, they will have to disclose the reasons for not having a corresponding label. For products with the „Sustainability Mixed Goals“ label, firms will have to provide a breakdown of assets invested according to each relevant label. Also, firms offering products with an ESG label will have to provide updates to reflect their progress towards achieving their sustainability objectives.
As far as pre-contractual disclosures are concerned, basically the same disclosures will be required, from December 2, 2024 for non-labelled products and from the date the label is first used for labelled ones.
—-
Finally, the FCA notes that it will proceed as proposed with its requirement to mandate distributors to make available to customers any labels and client-facing disclosures prior to the sale of a product.