We have lift-off! FCA publishes final rules on UK sustainability disclosure requirements and investment labels

More than two years after it published a Discussion Paper on the UK’s sustainability disclosure standards and investment labels (summarised here), the FCA has now published a Policy Statement setting out its final rules. Following the high-level structure set out in last year’s Consultation Paper (summarised here), the regime comprises investment labels, consumer-facing disclosures, detailed product-level and entity-level disclosures, naming and marketing rules and a general anti-greenwashing rule (see our separate blog post on the anti-greenwashing rules here).

There is a lot of detail to be unpacked, which we will cover in a briefing in the coming days, but some key takeaways for the UK funds and asset management industry are as follows:

• Most of the rules apply only to UK authorised managers, with aspects of the labelling, naming and marketing regime and the anti-greenwashing rule also applying to UK distributors. Non-UK funds and asset managers, portfolio managers and pension products are currently out of scope.
• Alongside the previously proposed (but now slightly re-named) labels – “sustainability focus”, “sustainability improvers” and “sustainability impact”, the FCA has created a new label “sustainability mixed goals”, for products which meet the requirements of two or more of the other labels.
  • The FCA has reiterated that the labels are available only for products seeking to achieve positive sustainability outcomes as part of their investment objective. Extending a requirement that previously applied only to the “sustainability focus” label, the new rules require that at least 70% of the gross assets of the relevant product must be invested in accordance with its sustainability objective.
  • In an important clarification, the “sustainability focus” label does not require the use of industry standards or any external verification – it is sufficient for the asset manager to assess compliance with a “robust, evidence-based” standard internally, provided that the use of such an internal function is disclosed in investor disclosures and that the internal function responsible for carrying out this assessment is independent of the investment management function.
  • On the “sustainability impact” label, the FCA has eased the “additionality” requirement and clarified that the rules do not require the investment of new capital and that the label is not limited to products which focus on underserved markets or address market failures.
  • Finally, as a significantly diluted version of the “do no significant harm” requirement under the EU Sustainable Finance Disclosure Regulation (SFDR), consumer-facing and pre-contractual disclosures will need to disclose if pursuing the sustainability objective could result in negative environmental or social outcomes. Relatedly, there is also a new rule that a product using a label should not invest in any asset which conflicts with its sustainability objective.
• The labelling regime remains an opt-in regime (i.e., asset managers can choose to apply the labels by notifying the FCA), supported by the naming and marketing regime. However, in an important departure from the earlier proposals, products which do not use a label are still permitted to use sustainability-related terms in their names and marketing materials, subject to certain key restrictions: (i) the product should have sustainability characteristics and at least 70% of the product’s portfolio should be aligned with those characteristics; (ii) the product’s name should be consistent with its sustainability characteristics, and in any event, should not contain the terms “sustainable”, “sustainability” and “impact”; and (iii) these funds are also required to provide the disclosures as funds using a sustainability label, together with a statement that the product does not use a label and the reasons why.
• The structure of the disclosure regime remains materially similar, save that consumer-facing disclosures are now required only for products which use a label or otherwise use sustainability-related terms in their names or marketing materials. In addition, UK-authorised asset managers will also be required to prepare pre-contractual and periodic disclosures at the product level in relation to such products. Finally, all UK-authorised asset managers are required to publish entity-level disclosures irrespective of whether they manage products with sustainability characteristics.
• The much-anticipated anti-greenwashing rule is materially unchanged, and requires all UK authorised firms to ensure that any reference to a product’s sustainability characteristics is consistent with those characteristics and is fair, clear and not misleading. The FCA is also consulting on guidance it proposes to publish alongside the anti-greenwashing rule.

In terms of timing, the first part of the regime to apply is the anti-greenwashing rule, which will apply from 31 May 2024. For products using labels, the labels, consumer-facing and pre-contractual disclosures and naming and marketing rules apply from 31 July 2024, and the periodic disclosures apply a year later from 31 July 2025. For products which are not using labels but have sustainability-related terms in their names or marketing materials, the consumer-facing and pre-contractual disclosures and naming and marketing rules apply from 2 December 2024, and the periodic disclosures apply 12 months after the first use of the sustainability-related terms. Entity-level disclosures will be required by asset managers with more than £50 billion in AUM from 2 December 2025 and by those with more than £5 billion in AUM a year later.