The FCA published today their long-awaited consultation paper on sustainability disclosure requirements and investment labels (the “Consultation“). This follows the discussion paper published in November 2021, which we summarised here.

The Consultation builds on the core elements of the regime outlined in the discussion paper: sustainable investment labels, consumer-facing disclosures, detailed product-level disclosures and entity-level disclosures. In addition, the Consultation also proposes naming and marketing rules with broader applicability, a general anti-greenwashing rule and other specific obligations on distributors.

In this post, we summarise our key takeaways from the Consultation, together with a high-level overview of the FCA’s proposals.

Key takeaways

  • The requirements:
    • Broadly speaking, the regime comprises a labelling regime, supplemented by several layers of disclosures starting with consumer-facing disclosures, through to more detailed entity and product-level disclosures.
    • In a change to the original proposal in the discussion paper, the number of labels has been changed from 5 to 3 – “sustainable focus”, “sustainable improvers” and “sustainable impact”. Products which are not labelled with one of these three labels but use sustainability concepts need to comply with the naming and marketing rules (on which more below).
    • In addition, there are now anti-greenwashing rules, naming and marketing rules, and rule for distributors (more details on all of these in the table below).
    • The labelling regime is expected to be an opt-in regime, where asset managers can choose to apply the proposed labels to their products subject to meeting the relevant eligibility requirements. The FCA has to be notified of the use of any sustainable investment labels although no regulatory approvals are required. The FCA expects that the UK Green Taxonomy, once finalised, will support the labelling regime.
  • Entities in scope:
    • The labelling, disclosure, naming and marketing requirements are directed principally at asset managers.
    • The discussion paper anticipated that FCA-regulated asset owners (such as pension and insurance funds) will also be in scope but this has been dropped in the Consultation, though the regime is expected to be extended to asset owners in due course.
    • The anti-greenwashing rule and the distribution obligations will apply more broadly to UK-authorised financial services firms. The anti-greenwashing rules applies to all regulated firms; and the distribution rules to distributors, including platforms and advisers.
    • The impact of the Consultation is therefore broader than asset managers. All UK-authorised firms should be familiarising themselves with the proposals and the potential impact it could have on their business and operations.
  • Divergence from EU SFDR:
    • The FCA accepts that the starting point of its proposed labelling regime is materially different to the EU SFDR and the US SEC rules.
    • The FCA’s policy rationale for categorising products is to help consumers identify sustainable investment products and navigate the market, and the proposed criteria are therefore designed to set a high bar for products that make sustainability claims.
    • The primary driver of the EU and US regimes, by contrast, has been to categorise products principally to determine disclosure requirements – this has led to “labels” with lower eligibility thresholds (such as “Article 8” under the EU SFDR).
    • In addition, although the FCA has sought to avoid inconsistencies with the EU SFDR, there are several respects in which the UK regime is materially different to the EU SFDR – to take two examples, the proposed labels do not map across onto the Article 6/8/9 classifications under the EU SFDR, and the FCA has also specifically elected not to adopt the concepts of “do no significant harm” (DNSH) and “principal adverse impacts” (PAI) which are important elements of the EU SFDR regime.
    • This means that while the two regimes are not inconsistent, to the extent a financial product falls within the scope of both regimes, the manager of such a product will need to comply with two distinct ESG labelling/classification regimes.
    • Annex 1 to the Consultation sets out a high level map to the EU SFDR and US SEC proposals – but this is merely a starting point and firms that may be impacted by all of these regimes will need to undertake a more detailed gap analysis.
  • Timing:
    • The Consultation closes on 25 January 2023, following which the FCA expects to publish the final rules by 30 June 2023.
    • The anti-greenwashing rule will come into force immediately upon the publication of the final rules in June 2023.
    • Generally, the rest of the rules relating to labelling requirements and pre-contractual disclosures will come into force by 30 June 2024 (on which more below).
    • Generally, the ongoing periodic disclosures will apply from 30 June 2025 (on which more below).

 

High level overview of the FCA’s proposals

Proposal Detail Scope Timing
Sustainable investment labels This opt-in regime aims to help consumers navigate the investment product landscape.

Firms will be able to attach one of three labels (subject to satisfying relevant criteria):

  • the “sustainable focus” label refers to products that aim to invest in assets that are environmentally and/or social sustainable;
  • the “sustainable improvers” label refers to products that aim to invest to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of the firm; and
  • the “sustainable impact” label refers to products that aim to invest in solutions to environmental or social problems, to achieve positive, real-world impact.

The FCA has made clear that these labels are mutually exclusive and there is no hierarchy in respect of these labels, and each type of product provides a different asset profile and meets different consumer preferences.

The FCA’s Fund Authorisation team will review, and may challenge, the categorisation of any new fund submitted for authorisation, but the FCA has made clear that such review will not constitute approval of the label.

Applicable to “in-scope firms” in respect of “in-scope products”.

The in-scope firms are as follows:

  • Portfolio managers
  • UCITS management companies
  • Self-managed UCITS
  • Full-scope UK AIFMs
  • Small authorised UK AIFM

Generally, then, UK-authorised asset managers.

The in-scope products are as follows:

  • Authorised funds (excluding feeder funds and funds in the process of winding up or termination)
  • Unauthorised  AIFs, including investment trusts
  • Portfolio management services
Generally, effective 12 months after publication of the Policy Statement (“PS“) (provisionally from 30 June 2024).

However, in respect of portfolio management services, the timeline is 18 months after the date of the PS (provisionally 30 December 2024).

Consumer facing disclosures This is a standalone disclosure requirement, which aims to help consumers understand the key sustainability-related features of a product by requiring firms to provide easily accessible product-level information.

Such information includes the product’s sustainability objective, investment approach and performance against the objective.

All in-scope firms marketing in-scope products to retail investors, irrespective of whether the product makes use of a label, but excluding firms providing portfolio management services.

Firms providing portfolio management services will not be required to produce consumer-facing disclosures, but will instead be required to provide an index of the underlying in-scope products, linking to their label and consumer-facing disclosure, as applicable.

12 months after the date of the PS (provisionally 30 June 2024).
Detailed disclosures at product and entity level Aimed at segments of the market that require greater detail (e.g. institutional investors), this regime will consist of the following three elements:

(i) Pre-contractual disclosures which cover the sustainability-related features of an investment product e.g. its sustainability objective and investment policy and strategy. Such disclosures could be set out in the fund prospectus and the information must be disclosed both for products which use a label and for products that do not use a label but which have sustainability-related features that are integral to their investment strategy.

(ii) In respect of products that use a label, a sustainability product-level report setting out ongoing sustainability-related performance information, including key sustainability-related performance indicators and metrics.

(iii) Irrespective of whether a label is used by a firm, a sustainability entity-level report covering how in-scope firms are managing sustainability-related risks and opportunities.

These disclosure obligations are intended to build on and supplement the TCFD disclosures.

In respect of pre-contractual disclosures

Applicable to: (i) all in-scope firms using a sustainable investment label, excluding firms providing portfolio management services; and (ii) firms not using a label but where sustainability-related features are integral to the investment policy and strategy (excluding firms providing portfolio management services).

Firms providing portfolio management services will not be required to produce pre-contractual disclosures, but will instead be required to provide access to the pre-contractual disclosures for the underlying in-scope products (or under the ‘on demand’ regime).

In respect of ongoing sustainability-related performance information

Applicable to all in-scope firms using a sustainable investment label, except firms providing portfolio management services and UK AIFMs managing unauthorised AIFs not listed on a recognised exchange.

Firms providing portfolio management services will not be required to produce Part B of the sustainability product report but will instead be required to provide access to the relevant reports for the underlying in-scope products.

Firms that are providing portfolio management services or are AIFMs managing unauthorised AIFs not listed on a recognised exchange will be required to provide information equivalent to the content of a Part A (pre-contractual disclosures) as applicable and Part B sustainability product report to clients on demand, where those clients require the information to meet their own legal obligations.

In respect of entity-level disclosures

All in-scope firms with assets under management (“AUM“) of £5 billion or more (on a 3-year rolling average) regarding overall assets managed in relation to in-scope business.

In respect of pre-contractual disclosures

12 months after the date of the PS (provisionally 30 June 2024).

In respect of ongoing sustainability-related performance information

The first ongoing sustainability performance-related disclosures must be published 24 months after publication of the PS (provisionally from around 30 June 2025).

In respect of entity-level disclosures

  • Firms with £50 billion or more in AUM: 24 months after the date of the PS (provisionally 30 June 2025)
  • Firms with less than £50 billion but with £5 billion or more in AUM: 36 months after the date of the PS (provisionally 30 June 2026).
Naming and marketing rules If a product does not make use of one of the three investment labels set out above, it will need to meet certain naming and marketing requirements.

In summary, asset managers providing in‑scope products to retail investors that do not qualify for and use one of the sustainable labels are prohibited from using sustainability‑related terms including (but not limited to) ‘ESG’ (or ‘environmental’, ‘social’ or ‘governance’), ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, ‘responsible’, ‘green’, ‘SDG’ (sustainable development goals), ‘Paris‑aligned’ or ‘net zero’ in their product names and marketing.

All in-scope firms marketing in-scope products to retail investors, that do not use a label. Generally, 12 months after the date of the PS (provisionally 30 June 2024).

In respect of firms providing portfolio management arrangements,18 months after the date of the PS (provisionally 30 December 2024).

Requirements for distributors This regime ensures that distributors make available to relevant retail investors the sustainable investment label and consumer-facing disclosures. Firms that are distributors of in-scope products to retail investors (including platforms and advisers). 12 months after the date of the PS (provisionally 30 June 2024).
Greenwashing rule Applicable to all regulated firms, this regime reiterates existing rules to clarify that sustainability-related claims must be clear, fair and not misleading, taking into account any sustainability-related claims. Applicable to all FCA-regulated firms in respect of all products and services. Applicable upon publication of the PS, expected to be published during H1 2023 (provisionally from 30 June 2023).

 

The FCA has also published a related Occasional Paper and research in respect of sustainability factsheets.

 

Marina Reason
Marina Reason
Partner
+44 20 7466 2288
Nish Dissanayake
Nish Dissanayake
Partner
+44 20 7466 2365
Rebecca Perlman
Rebecca Perlman
Partner
+44 20 7466 2075
Heike Schmitz
Heike Schmitz
Partner
+49 211 975 59012
Shantanu Naravane
Shantanu Naravane
Senior Associate
+44 20 7466 2077
Jed Wilsher
Jed Wilsher
Associate
+44 20 3692 9682
Trystan Cullinan
Trystan Cullinan
Trainee Solicitor
+44 20 7466 2628