FCA adds extra label to finalised Sustainability Disclosure Requirements

The UK Financial Conduct Authority has added a fourth label to the SDR to account for funds that have ‘mixed goals’, and launched a consultation on its anti-greenwashing rules

The Financial Conduct Authority has added a “sustainability mixed goals” label to its Sustainability Disclosure Requirements regime, which will apply to funds that combine the attributes of its existing three sustainability labels of “focus”, “improvers” and “impact”.

The regulator estimates that around 630 UK-based funds use sustainability-related terms, of which 45 per cent will use its investment labels.

On November 28, the FCA published its long-awaited policy statement on SDR, which is designed to help retail investors understand funds’ sustainability characteristics. It ran a consultation on the proposed regime from the end of 2022 until January, and the release of its policy statement has been delayed twice.

The FCA created the new label after its consultation revealed concerns that funds with a spread of the characteristics carried by the original three categories would not fit neatly into any of these categories.

It has also relaxed some of its naming and marketing rules, and has launched a consultation on anti-greenwashing rules. 

“We welcome the attempt to impose guardrails and standards, while holding asset managers to account for the metrics that are actually used in bottom-up portfolio construction, rather than adding to the data reporting burden,” Iancu Daramus, Fulcrum Asset Management’s head of sustainability, told Sustainable Views.

Label changes

The SDR regime comes into full effect in December 2024, but funds can start using the labels from July 2024. The regime applies solely to UK-based funds and, unlike Europe’s Sustainable Finance Disclosure Regulation, the labels are not compulsory. 

The FCA has also made changes to the existing three categories. It received concerns about its “improvers” label, which would apply to funds aiming to improve the sustainability credentials of assets over time. Some respondents to the consultation suggested it would be difficult to prove a causal link between stewardship activities and asset improvements. Firms will now not have to show this link, the FCA said. 

The regulator has also removed references to terms such as “engagement” and “voting”, which it accepted could imply a specific approach to stewardship.

Paul Dennis, investment director at financial adviser Holden & Partners, acknowledged the importance of introducing the mixed label, but said he feared that this “will now become the catch-all label,” with all potentially sustainable investments ending up in there. He had previously feared this would be the lot of the ‘improvers’ label.

The FCA rejected requests to change the “impact” label – for investments into solutions to problems facing people or the planet – to “solutions”, by respondents who said that all labels achieve a form of impact. References to “real-world impact” within the label’s criteria have been removed, however, and the FCA also clarified that investments in public markets qualify under the label.

Meanwhile, queries were also asked about the planned “focus” label, under which investments were originally defined as having “a credible standard of environmental or social sustainability”. The FCA has now removed the term “credible” and refers, instead, to “a robust, evidence-based standard that is an absolute measure of sustainability”. 

Originally, this was the only label that carried a threshold demanding that at least 70 per cent of the gross value of a product’s assets are invested in line with its objectives. Under the finalised rules, the 70 per cent minimum threshold applies across all four labels.

The FCA pointed out that planned thresholds are higher in other jurisdictions, noting that the European Securities and Markets Authority and the US Securities and Exchange Commission have proposed an 80 per cent threshold for fund naming rules.

Marketing proposals were ‘too constraining’

The FCA had proposed that products that do not use its labels would not be permitted to use sustainability-related terms in their names and marketing. 

The regulator acknowledged, however, that while a minority of respondents backed its proposals for the naming and marketing of funds, many viewed its approach, especially to marketing, “to be too constraining”. 

It is relaxing its rules to allow firms to use terms relating to sustainability in their product names and marketing even if they do not use a label, provided that they meet certain conditions, such as carrying a statement to confirm that the product does not have a label and explain its absence.

“Some may still consider the conditions to be quite onerous, particularly the disclosure related conditions,” said Raza Naeem, financial regulation partner at law firm Linklaters.

The FCA has stipulated, however, that the terms “sustainable”, “sustainability”, “impact”, and any play on those terms, must not be used in the names of products without labels. Its naming and marketing rules come into force on December 2, 2024.

Anti-greenwashing consultation

The FCA says its anti-greenwashing rules, meanwhile, will enter force in May 2024. Originally they were planned to coincide with the publication of its policy statement on SDR, but the regulator says the industry had asked for more time, given the possibility of “operational issues when trying to implement them alongside the rest of the SDR regime”.

The rules will apply to all communications regarding financial products or services that refer to their environmental or social attributes, with the intention of ensuring that sustainability-related claims are “fair, clear and not misleading”. The FCA consultation will run until January 26.

“The fact the FCA is consulting on guidance for firms helps, but there will likely be a lot of nervousness among firms who will feel greater responsibility to make sure that any sustainability-related claims can be substantiated and do not omit or hide important information,” said Linklaters managing associate James Morris.