Investment industry gives nod to FCA's Sustainability Disclosure Requirements

Investors react with both goodwill and apprehension to the UK financial services regulatory body presenting its delayed Sustainability Disclosure Requirements (SDR) and investment labels.

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What has the industry made of the FCA's announcement?

The long-awaited final approach of the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR) and investment labels in the UK was announced on Tuesday afternoon.

The flagship scheme has been beset by postponements and myriad back and forth with the industry.

In an announcement on Tuesday, the FCA said: “With an estimated $18.4 trillion of ESG-orientated assets now being managed globally, the FCA is putting in place new Sustainability Disclosure Requirements and an investment labels regime after detailed engagement with a range of stakeholders, including industry, other regulators and consumer groups.”

The announcement comes the week COP 28 kicks off in Dubai amid controversy, and several months after diluted net zero promises from the UK government.

The package announced by the FCA includes “the consumer-focused labelling regime, [that] will support the UK’s position as a world-leading, competitive centre for asset management and sustainable investment”.

“By improving trust in the sustainable investment market, the UK will maintain its position at the forefront of sustainable finance."

'We’re putting in place a simple 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, FCA.

Sadan added that the rules hoped to forge part of the UK’s post-Brexit financial services identity and act as a magnet for investment. “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,” he said.

He continued, adding that the changes followed the Financial Lives survey, which “highlighted that a significant majority of adults in the UK would like to invest in a way that protects the environment and has a positive social impact”.

As part of the SDRs, the FCA listed the following as part of the measures:

  • An anti-greenwashing rule for all FCA-authorised firms to reinforce that sustainability-related claims must be fair, clear and not misleading. We are also consulting on supporting guidance.
  • Naming and marketing rules for investment products, to ensure the use of sustainability-related terms is accurate.
  • Four labels to help consumers navigate the investment product landscape and enhance consumer trust.
  • Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product.
  • Detailed information targeted at institutional investors and consumers seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures.
  • Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

Earlier this year, members of the investment industry were both split in their reaction to the FCA proposals – and their length of time. Some said it was a good idea to take their time with it to better understand industry needs, while others were less keen on the delays.

"We believe that the new investment labels can address concerns often raised by savers over their funds’ sustainability claims and profile."

Reaction was instantaneous with most happy about the changes. “This is an important moment in our industry’s efforts to build greater confidence and trust among retail investors in the UK’s evolving sustainable investing market,” said UKSIF Chief Executive, James Alexander. “We believe that the new investment labels can address concerns often raised by savers over their funds’ sustainability claims and profile.

Alexander highlighted the number of important revisions to the regime to address potential implementation challenges and promote greater transparency for savers as a plus, too. “These include refining some of the underlying criteria for the labels and the operation of the marketing rules, as well as direct recognition of the important role of multi-asset funds and blended strategies under the regime.”

Last year, some fund operators showed growing scepticism about what greenwashing meant for the industry. Some argued that, amid the call for more transparent and measurable ESG data, greenwashing was no longer an effective focus.

A spokesperson for Legal & General group told Insurance Investor that the SDRs would affect parts of their business largely on the asset management side, and that they were glad to see progress with the new rules, as well as a co-operative attitude from all parties that enabled them time to digest and respond to the news.

“Increasing clarity and trust to deliver better client outcomes in the responsible investment market is an important goal and we see yesterday’s announcement by the FCA setting out its SDR regime as a step to achieving that,” said the spokesperson. “We look forward to working with the FCA and the wider UK investment industry as we take the time to consider the policy implications in detail.”  

What will they mean?

The anti-greenwashing rule will apply to all FCA-authorised firms that make sustainability-related claims about products and services.

The FCA added that the investment labels, disclosure, and naming and marketing rules apply to UK asset managers.

“We have also introduced targeted rules for the distributors of investment products to retail investors in the UK,” said the FCA’s statement.

Law firm Eversheds Sutherland said in its analysis of the rules that “surprisingly the anti-greenwashing rules and guidance, which were expected to take immediate effect, will not come into force until 31 May 2024.”

This comes as the FCA has also published GC23/3, opening a consultation on supporting guidance for the anti-greenwashing rule, which will close on 26 January 2024.

What happens now?

The FCA said it would continue to engage with stakeholders directly, including to help firms implement the rules.

“The regulator should engage with regulatory authorities in overseas markets to shape jurisdictions’ approaches to disclosures and fund labels.”

Others, however, still wanted more. Alexander said that “going forward, we would like to see the FCA consider convening the Disclosures and Labels Advisory Group (DLAG), or a similar industry group, on an ongoing basis to help the regime’s implementation in the market and monitor greenwashing risks. The regulator should continue to closely engage with regulatory authorities in overseas markets to positively shape jurisdictions’ approaches to disclosures and fund labels and promote international harmonisation.”