Updates from the FCA on SDR and Greenwashing

On November 28, the United Kingdom Financial Conduct Authority (FCA) published a policy statement (Policy Statement) on its upcoming sustainability disclosure requirements (SDR). The statement contains new rules and guidance covering, among other things, greenwashing, investment labelling, and naming and marketing requirements, with the aim of improving trust and transparency in the market for sustainable investment products.

The Rules and Guidance

The Policy Statement follows the FCA’s earlier consultation paper, published in October 2022, which in turn built on the FCA’s November 2021 discussion paper. The essential elements of the proposals remain the same but there are some noteworthy changes.

Anti-Greenwashing Rule

All FCA-authorized firms must ensure that sustainability-related claims are fair, clear, and not misleading. The rule will apply to all communications about financial products or services which refer to the environmental or social characteristics of those products or services.

The FCA initially proposed that this rule would come into effect on the publication of the Policy Statement. However, in response to industry concerns over timelines, the effective date has been delayed to May 31, 2024. In the meantime, the FCA has launched a consultation on its new anti-greenwashing guidance. The guidance explains that to be “fair, clear and not misleading,” claims should be correct, capable of substantiation, clearly presented, complete, and fair and meaningful in relation to any comparisons with other products or services. The consultation will remain open until January 26, 2024.

Investment Labels

The labelling regime will allow firms to use one of four labels for their products if they meet certain qualifying criteria. The labels are: (1) “Sustainability Impact” (for products designed to provide solutions to environmental or social problems); (2) “Sustainability Focus” (for investment in assets that are environmentally or socially sustainable); (3) “Sustainability Improvers” (for products designed to improve the sustainability of assets over time); and (4) “Sustainability Mixed Goals.” Sustainability Mixed Goals is intended to address concerns that funds invested with a combination of the attributes of other labels might fall between categories.

Naming and Marketing Rules

The FCA proposed to prevent firms which offer non-labelled products to retail investors from using terms such as “ESG,” “green,” or “sustainable.” This received broadly negative feedback in the latest consultation. Consequently, the FCA will allow firms to use sustainability-related terms for non-labelled products if they make certain disclosures (see below), and a statement to clarify why they do not use a label.

Disclosures

Firms that offer products using a label or sustainability-related terms without a label must:

• Provide consumer-facing disclosure in a prominent place on the digital medium through which the product is offered.
• Include sustainability information in pre-contractual disclosure (i.e., from the date the label is first used or by December 2, 2024 for products without a label) and ongoing product-level disclosure.

The disclosure must include the following information:

• The product’s sustainability objective and label, or a statement to clarify that the product does not have a label
• The investment policy and strategy (including what the product will and will not invest in)
• Appropriate sustainability-related metrics
• Details of where a consumer can access other relevant sustainability and non-sustainability information
• For the “Sustainability Mixed Goals” label only, the proportion of assets invested in accordance with each of the other three relevant labels

Additionally, the FCA proposes that all asset managers with assets under management above a certain threshold (£50 billion initially, then £5 billion) must disclose how they are managing risks and opportunities in a “sustainability entity report.”

Distributors

Distributors must ensure that labels and consumer-facing disclosure are available to retail investors, either on a relevant digital medium or using a channel they would ordinarily use to communicate information. They must keep the labels and disclosures up to date.

Who Will This Affect?

The anti-greenwashing rule applies to all FCA-authorized firms who make sustainability-related claims about their products and services. The investment labels, disclosure, and naming and marketing rules apply to UK asset managers. The distribution rules apply to distributors of investment products to retail investors in the UK. The rules do not apply to portfolio management products and services yet, though the FCA will consult on a wider application in the near future.

What Happens Next?

The key dates are:

May 31, 2024: The anti-greenwashing rule comes into force.

July 31, 2024: Firms can begin to use labels, with accompanying disclosures.

December 2, 2024: The naming and marketing rules come into force, with accompanying disclosures.

December 2, 2025: Ongoing product-level and entity-level disclosures for firms with AUM above £50 billion.

December 2, 2026: Entity-level disclosure rules are extended to firms with AUM above £5 billion.

The FCA advises that:

• All authorized firms should prepare for the anti-greenwashing rules and read the associated guidance.
• UK asset managers should decide whether to label products or use sustainability-related terms and should familiarize themselves with the new regime.

This Advisory provides a high-level summary of the Policy Statement and SDR regime. Please reach out to any of the authors or your regular Arnold & Porter contact if you have specific questions or would like our advice or support on particular issues regarding the Policy Statement, the upcoming sustainability disclosure requirements, or any other matter.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.