The long-awaited publication of the Sustainability Disclosure Requirements (SDR) consultation policy statement has finally been released by the Financial Conduct Authority.
The statement sees four labels introduced to sustainable funds, instead of three.
The main aim behind the SDR is to “improve the trust and transparency of sustainable investment products and minimise greenwashing”.
Greenwashing is define as the act of “making people believe that your company is doing more to protect the environment than it really is”.
Due to an estimated $18.4trn of environmental, social and governance (ESG) assets now being managed globally, the FCA has implemented an investments label regime.
The labelling regime will support “the UK’s position as a world-leading, competitive centre for asset management and sustainable investment.”
The FCA found that investors were not confident that sustainability-related claims made about investments were genuine.
This was made worse by the fact that firms showed a lack of consistency when using such terms as ‘ESG’, ‘green’ or ‘sustainable’.
The original three labels were ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’ with FCA executive director, consumers and competition Sheldon Mills announcing the fourth label being named ‘sustainability mixed goal’.
Mills added: “We have built this regime with consumers in mind” to be “fair, clear and not misleading”.
The FCA has also introduced an anti-greenwashing rule for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading.
A product labelling system to help investors understand what their money is being used for, based on clear sustainability goals and criteria.
FCA director of ESG Sacha Sadan explained that a lot of work had gone into the SDR.
He also added that 45% of the 630 sustainable funds will receive a label from the FCA.
Sadan added that there are some “really good” sustainable funds out there that do not have a label, but stated that this is “OK for them”.
He said: “Many funds are not receiving a label but still are still achieving sustainability, but consumers will be given the choice to stay invested in the fund or not.”
The FCA is also announcing today the launch of a working group of financial advisers to ensure they can educate clients on the funds which do not possess a label.
Sadan added that “financial advisers are very important” and are offering educational and training schemes to asset managers and advisers on this subject.
If a fund does receive a label, it must explain to investors what it is actually doing, Sadan added.
Additionally, the FCA has worked with the Advertising Standards Authority (ASA) and the Competition and Markets Authority (CMA) to ensure greenwashing stops taking place in ads.
The FCA has implemented a 70% threshold as part of the labelling system.
In order for the investment to be categorised as an ESG fund, the regulator says it must hold at least 70% of the product’s assets “which meet a credible standard of environmental, social sustainability, or align with a specified environmental theme”.
When asked about this rule, Mills explained: “We need to be proportional and pragmatic.
“The industry needs some flexibility and room, even within an impact fund.”
Sadan said: “We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity.
“By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment.”
The SDR consultation publication was originally scheduled for 2023 Q2, but was then pushed back to Q3, and then pushed back again to Q4.
In June, Square Mile strategic relationships director James Glover said the FCA had seen the biggest-ever response to a consultation.
EY UK sustainable finance partner Richard Monks said: “The SDR regime, published today, is the most significant single piece of UK sustainable finance regulation to date.
“Following strong industry feedback during the consultation, firms are expected to particularly welcome the creation of the “Sustainability Mixed Goal” label, which bring funds that invest in a blend of strategies into the regime.
“However, proposed guidance on the anti-greenwashing rule still requires consultation, ahead of a 6-month implementation period, reflecting the complexities that firms face in managing this risk.
“There is flexibility around meeting the SDR, and firms will need to make their own judgements about labels, disclosures and data, and anticipate end-consumer outcomes – all of which come with their own challenges.
“Helpfully, the rules allow for the continued use of most sustainability-related terms provided appropriate disclosures are made.
“While the new regime largely comes into force in December 2024, labels can be used from August next year, so firms that can mobilise quickly can look to gain commercial advantage.
“The FCA clearly expects firms adhere to this high regulatory standard by the deadline, and firms now face a challenge to meet tight implementation timelines, with many needing to review and adapt their current plans.”
