FCA Sustainability Disclosure Requirements – understanding the new requirements around ‘sustainable’ investment products

On 28 November 2023, the Financial Conduct Authority (FCA) published policy statement PS23/16 Sustainability Disclosure Requirements and investment labels, setting out final rules and guidance for relevant firms to comply with to help consumers understand the extent to which investments and products are sustainable.

In times of increasing investment in ESG and consumer focus on sustainability, it follows that there should be clear rules and a level playing field on claims about ESG credentials. Up until this point, the use of ESG-related terms and claims has been subjective which makes it difficult for customers to understand or compare the extent to which investments and products are actually sustainable.

For firms already complying with the EU’s Sustainable Finance Disclosures Regulation, a lot of work will already have been carried out to adhere with those requirements. However, there are differences between the two regimes which will require detailed review.

According to the FCA, “80% of consumers want their money to do good, as well as deliver a return”. And, according to a study by Boring Money, “seven in 10 investors say they think that many investments that claim to be sustainable actually aren’t”.

In summary, the new measures introduce six new requirements:

1. Anti-greenwashing: Up until this point, there have been no specific requirements around sustainability disclosures. Arguably theses disclosures should always have been “fair, clear and not misleading”, but this is now a specific requirement and the FCA is consulting on the guidance included within the publication. Final guidance is expected in May 2024.
2. Rules for investment products: New rules for naming and marketing of investments have been introduced to ensure accuracy and to provide some clarity and consistency. A wide range of terms can still be used (in contrast to the labels which are specific) but to do so, the specified requirements on the use of the terms must be met. Terms include ESG (individually and collectively), climate, net zero, impact and responsible.
3. Labelling: In addition to the requirements for naming and marketing products, there are now four labels which firms can choose to use to help consumers understand and compare products. Firms deciding to use a label must be able to meet the requirements and evidence it. These are sustainability impact, sustainability focus, sustainability improvers and sustainability mixed goals. There are prescribed rules governing the use of such labels and one example is that 70% of the gross value of the product’s assets must be invested in accordance with its sustainability objective.
4. Additional disclosures: Despite consultation responses requesting that disclosures be made in an existing document, such as the Key Investor Information Document (“KIID”), the FCA has stuck with the requirement to be a stand-alone disclosure in a prominent place.
5. Further information: For firms deciding to use a label or using sustainability-related terms in the name or marketing, they must include sustainability information in pre-contractual disclosures and in annual ongoing product-level disclosures. For those firms using a label, this should generally cover the qualifying criteria for the label.
6. Distributors: There are also requirements on distributors to ensure that product-level information (including the labels) is made available to investors. We anticipate that this will likely be consistent with how other required disclosures are made available e.g. KIIDs

Who do these new sustainability disclosure requirements apply to?

The measures broadly apply across three main areas:

1. To all FCA authorised firms which make sustainability related claims about products and services
2. To asset managers in relation to investment labels, disclosure, naming and marketing rules
3. To distributors of investment products to retail investors

When will new FCA sustainability disclosure agreements apply from?

The FCA was keen not to delay the anti-greenwashing rule, so the impact is that different measures will apply at different times, and further responses and guidance will be issued along the way.

• 31 May 2024 Anti-greenwashing rule and guidance
• 31 July 2024 Firms can begin to use labels, with accompanying disclosures
• 2 December 2024 Naming and marketing rules
• 2 December 2025 Ongoing product-level and entity-level disclosures for firms with >£50bn
• 2 December 2026 Entity-level disclosures extended to firms with >£5bn

What’s next?

Firms should consider a documentation review for all references to sustainability, ESG, environmental etc. and assess this in the context of the stricter requirements. For some firms, decisions need to be made in relation to whether to use the labels and how the underlying requirements, including ongoing monitoring, will be met. Firms should also consider the process for drafting new disclosure documents and work with platforms and distributors to make these available.

Whilst the anti-greenwashing rules apply to all FCA authorised firms, this isn’t the case (at least yet) for other rules and therefore next steps are expected in relation to overseas funds, portfolio management, and pension and other investment products and advisers.

The FCA set out in the policy statement how it will measure success, and to the extent that it minimizes greenwashing and makes it easier and clearer for consumers to assess products and services from a sustainability perspective, that can only be a good thing. It will also be useful to monitor the extent to which the labels are used and what impact this has on costs and performance.