The Financial Conduct Authority (FCA) published its Sustainability Disclosure Requirements and investment label regime designed to crack down on greenwashing.
The regulator added an additional label, bringing the total number to four which will address issues arising in the consultation process about multi-asset and blended strategies, which did not fit into the previous three categories.
Following feedback, the FCA removed the word sustainable and replaced it with sustainability, to reflect how some assets are “on a journey to becoming sustainable”.
As a result, the new monikers will be sustainability mixed goals, sustainability focus, sustainability improvement, and sustainability impact.
Alongside the four labels, the FCA will introduce anti-greenwashing and naming and marketing rules.
The former will be open for consultation until 26 January 2024 and will come into force at the end of May 2024. It will require firms to make fair, clear and non-misleading claims on the sustainability profile of their products and services.
The latter specifies that any product with sustainability-related terms in their names must be reflected in their sustainability characteristics, which should also be marketed accordingly and in line with the anti-greenwashing rule.
“We are 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,” said Sacha Sadan, director of environmental, social and governance at the FCA.
He added, “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.”
However, the FCA also significantly reduced the proportion of assets that had to be allocated to sustainable assets in order for funds to qualify for the ‘impact’ label. Originally, 100% of the fund had to qualify, but this has dropped to 70% under the final rules.
Speaking during a press briefing, Sheldon Mills, the FCA’s executive director for consumers and competition, said the decrease was “pragmatic”, and would allow more funds to be created in the impact category.
The regime still requires managers to be able to demonstrate that none of the assets in any labelled fund significantly harm broader sustainability objectives.
The revisions clarify that, while achieving additionality via primary market investment is an important part of achieving impact, that emphasis doesn’t preclude public equities strategies from being able to qualify for the label.
The final package was introduced a year after an initial consultation and publication of the proposals was delayed twice because of the high number – around 240 of written responses.
When announced in the summer co-chairs Nikhil Rathi, CEO of the FCA, and Sam Woods, deputy governor, prudential regulation at the Bank of England, said, “Following the FCA’s Sustainability Disclosure Requirements and investment labels consultation and the range of comments, we have decided to publish the Policy Statement in Q4 2023, having been previously planned for Q3 2023.”
The industry has broadly welcomed the SDR although there are concerns that it could create an uneven playing field because funds that do not qualify for a green label are not required to make ESG disclosures.
However, many believe the new labelling regime will have a positive impact. As Phuong Gomard, principal, sustainable finance practice leader at Mazars, puts it, “The publication of the FCA’s SDR has been long-awaited but should strengthen the sustainable investing market by providing a credible framework for disclosure and labelling of investment funds.
The introduction of four distinct labels will make it easier for UK investors to make informed choices when buying funds that contribute positively to environmental, social and sustainability outcomes. This is undoubtedly a positive step forward”.
Tom Willman, regulatory lead at Clarity AI also noted that the SDR proposal marked a departure from the EU’s SFDR (Sustainable Finance Disclosures Regulation) by introducing explicit labels that will support fund managers to categorise their funds and ultimately help end investors choose products that best match their sustainability preferences.
He added, “It is an approach being mirrored across other geographies including by the European Commission as part of its level 1 review of the SFDR.”
The SFDR has been controversial and the European Commission and has proposed two approaches to making it more practical – either to bolster its existing methodology or to abandon the SFDR’s Article 8 and 9 categories in favour of formal labels based on sustainability objectives – mirroring the UK.
Earlier this month, the Dutch financial markets authority came out in support of getting rid of Article 8 and 9, echoing similar calls from France.
© Markets Media Europe 2023
