FCA publishes proposals for UK Sustainability Disclosure Requirements (SDR) and investment labelling regime

The FCA has published its long-awaited proposals on the UK’s sustainability disclosure and investment labels regime. The proposals introduce investment labels and corresponding product and entity-level disclosures for in-scope products marketed to retail investors and institutional investors in the UK. 

Authorised UK AIFMs and firms carrying out portfolio management services (where 90% or more of the value of the products in which they invest qualify for the label) are currently in scope of the proposals. The FCA will shortly consult on extending the regime to non-UK products marketed in the UK (which will likely bring into scope US and EU managers marketing funds in the UK) and plans to introduce additional rules for distributors of investment products to retail investors in the UK.

Unlike the SFDR or proposed SEC rules, the proposed UK labelling regime is non-hierarchical in nature and no label is meant to be 'better' (or 'greener') than others. Each of the three labels (‘Sustainable Focus’, ‘Sustainable Improvers’ and ‘Sustainable Impact’) are instead designed to deliver a different profile of assets and consumer preferences. There is also no obligation or requirement to use the labels, however firms that do so will be able to prominently ‘stamp’ their product with the relevant label graphic (which will soon be trademarked). Firms marketing to UK retail investors that choose not to use a label (or do not qualify to do so) will be subject to additional naming and marketing restrictions.

Where a sustainable investment label is used, certain product-level disclosures (regarding the sustainability-related features of the product) will be required. These include ‘consumer facing disclosures’ made available on the firm’s website or app, ‘pre-contractual disclosures’ in the PPM, or ‘periodic disclosures’ in the firm’s sustainability product report. Additional entity-level disclosures (regarding how sustainability-related risks and opportunities are managed) to be made in a firm’s sustainability report will be also required, regardless of whether an in-scope firm uses a label. The sustainability product and entity reports build on the current form of reports required under the TCFD disclosures.

A general ‘anti‑greenwashing’ rule will also apply to all FCA regulated firms and extends the existing fair, clear and not misleading principle to all sustainability-related communications. Distributors will also need to ensure that product-level information (including the labels) is made available to consumers.

A policy statement will be published in mid-2023. From this date the new anti-greenwashing rule will apply. For all other proposals, the date of application is provisionally planned for 30 June 2024 (12 months after publication of the policy statement).

For global asset managers, the proposed FCA rules are yet another regime which will need to be navigated in the ever-evolving ESG regulatory landscape. For UK regulated firms, the new rules are in addition to the FCA’s climate related disclosure regime which came into force earlier this year and which will be extended to.