FCA proposes new guidance on Sustainability Disclosure Requirements (SDR) and investment labels
Posted on 1 Nov 2022
The FCA released their Consultation Paper CP22/20 in October 2022, which suggests that greater clarity and action is needed to make consumers aware of the sustainability of their investments.
Why this matters
This matters as it will affect the way in which all investments are made. The new guidance will require clearer disclosures of sustainability by distributors, who must observe the criteria which will dictate if they must make a disclosure. This may consequentially affect the actions of consumers, who will potentially wish to invest in a particular way due to their own ethics or individual interests. This should provide greater scrutiny and further prevent ‘green-washing’.
The FCA’s Consultation Paper CP22/20 proposes that sustainable investment labels be more consistently used in order to help consumers navigate the investment product landscape and enhance consumer trust. They also point to consumer‑facing disclosures which would help consumers understand the key sustainability-related features of a product. In addition, they detail the different types of disclosures targeted at a wider audience (for example, institutional investors and consumers seeking more information). These consist of pre‑contractual disclosures (such as in the fund prospectus), covering the sustainability-related features of investment products. They also consist of the ongoing sustainability‑related performance information, including key sustainability-related performance indicators and metrics, in a sustainability product report, and sustainability entity reports which cover how firms are managing sustainability-related risks and opportunities.
Naming and marketing rules will help to restrict the use of certain sustainability-related terms in product names and marketing materials (unless the product uses a sustainable investment label). There would also be requirements for distributors to ensure that product-level information (including the labels) is made available to consumers. Furthermore, a general ‘anti‑greenwashing’ rule is proposed, which will be applied to all regulated firms, to reiterate existing rules to clarify that sustainability-related claims must be clear, fair and not misleading.
The FCA will use multiple methods in order to measure the success of the new policy. They will monitor use of the sustainable investment labels by firms, for example through a review of the characteristics of labelled products to assess whether they are meeting our criteria and how they are performing against their commitments. They also plan to assess the usefulness of the labels and product-level information to consumers through consumer groups such as ‘Which?’ and their own Financial Lives Survey. By working with regulators such as the Prudential Regulation Authority (PRA) and Financial Reporting Council (FRC), they will assess the provision of sustainability-related information through the FCA ESG Division’s Market Intelligence and Engagement team’s horizon-scanning activities. They will assess the incidence of greenwashing by firms through monitoring complaints made to the FCA’s Supervision Hub and intelligence gathered on quality of applications made to Fund Authorisations. Finally, a post-implementation review will be carried out after three years of the regime coming into force.
Who this affects
This affects all consumers and distributors, as this guidance is in line with the Government’s commitment to attain a net-zero economy by the year 2050. This Consultation Paper (‘CP’) will be of interest to all FCA-regulated firms, as the FCA are proposing to introduce a general ‘anti-greenwashing’ rule that will apply to all firms. The core elements of the regime – labelling and classification, disclosure and naming and marketing rules – will apply to asset managers initially.