FCA ESG developments: FCA consults on extending SDR to portfolio managers and publishes anti-greenwashing guidance - Impact for private fund advisers

As part of its broader focus on greenwashing, this week the Financial Conduct Authority (FCA) has launched a consultation on extending the Sustainability Disclosure Requirements (SDR) to portfolio managers and it has also published the final guidance on its anti-greenwashing rule which will apply to all FCA-regulated firms from the end of May this year.

Extension of SDR to portfolio managers

The existing SDR rules apply to UK fund managers of UK funds and the regime has various components, including an anti-greenwashing rule, an investment labelling regime, marketing and naming rules and associated disclosure requirements. The consultation will extend these rules in a similar way to portfolio managers, which includes both discretionary managers and advisers in the private markets, including private equity. 

Key takeaways for private fund advisers

The rules are unlikely to have a significant impact on typical private fund advisers who provide services to institutional clients. This is because:

• Managers/advisers to professional clients will not be required to comply with the labelling regime, but can opt in, and the naming and marketing rule will not apply. Time will tell whether advisers come under pressure from professional clients, to whom they provide SMA services, to opt into the labelling regime but we suspect this will be limited. 
• There is a requirement for managers/advisers with AUM above £5 billion (regardless of whether they use a label or sustainability-related terms) to produce an annual report on how they are managing sustainability risks and opportunities (building on the existing climate related reports which are already required). However, these and other rules will not apply where the clients are not in the UK or where the client is a fund or management company for a fund (i.e., where the portfolio manager acts as a delegate). This will limit the scope of these rules in particular for UK advisers to non-UK funds/managers. 

Anti-Greenwashing Rule guidance

The FCA has published its final guidance on the Anti-Greenwashing Rule to help firms better understand the regulator’s expectations. The rule requires that any reference to the sustainability characteristics of a product or service is: consistent with the sustainability characteristics of the product or service, and is fair, clear and not misleading. More specifically, the guidance requires sustainability reference to be:

• Correct and capable of being substantiated;
• Clear and presented in a way that can be understood;
• Complete – they should not omit or hide important information and should consider the full life cycle of the product or service; and
• Comparisons to other products or services should be fair and meaningful.

The guidance also provides a list of examples to help with the application of the above criteria.

Key takeaways for private fund advisers

The guidance clarifies that the anti-greenwashing rule applies when a UK regulated adviser: 

• Communicates with clients in the UK in relation to a product or service; and
• Communicates a financial promotion (or approves a financial promotion for communication) to a person in the UK (broadly, this will capture marketing materials/statements about any product/service). 

Whilst the above is helpful as there was some uncertainty around whether the rule applies more broadly to statements made in relation to the adviser itself rather than those related to a product or service, the FCA makes clear that firms are subject to other rules regarding the claims they make about themselves and other-firm level disclosures so should nevertheless take into account how firm-level claims may be considered as part of the ‘representative picture’ in a decision-making process. As such, whilst the guidance strictly applies to products/services, advisers should ensure broader claims (including on their website) are clear, fair and not misleading. 

Whilst advisers have always been subject to rules requiring their communications to be clear, fair and not misleading, in terms of next steps, firms should review the guidance and put in place processes to ensure marketing materials (both written and oral) comply before the rule comes into force at the end of May. 

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