New FCA rules on greenwashing and sustainability disclosures and product labelling
The FCA has just published its Policy Statement PS23/16 - Sustainability Disclosure Requirements (SDR) and investment labels.
It contains the FCA's final rules comprising:-
- An anti-greenwashing rule for all FCA authorised firms to reinforce the message that sustainability-related claims must be fair, clear and not misleading. They are also consulting on supporting guidance;
- Four Sustainability labels to help consumers navigate the investment product landscape;
- Naming and marketing rules for investment products, to ensure the use of sustainability-related terms is accurate;
- Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of products;
- Detailed information in pre-contractual, ongoing product-level, and entity-level disclosures, targeted at both institutional investors and consumers; and
- Requirements for distributors to ensure that product-level information (including labels) is made available to consumers.
The anti-greenwashing rule and guidance comes into force on 31 May 2024.
Firms can begin to use labels, with accompanying disclosures, from 31 July 2024.
Naming and marketing rules come into force, with accompanying disclosure on 2 December 2024.
Ongoing product-level and entity-level disclosures for firms with AUM greater than £50 billion will come into force on 2 December 2025.
Entity-level disclosure rules extended to firms with assets under management (AUM) greater than £5 billion will come into force on 2 December 2026.
In this bulletin we focus on what we see as the key provisions for firms and consumers.
1. The anti-greenwashing rule
The rule applies to all firms (whether undertaking "sustainability in-scope business" (see below) or not) which:-
(a). communicate with a client in the UK in relation to a product or service; or
(b). communicate a financial promotion to, or approve a financial promotion for communication to, a person in the UK.
The rule provides that firms must ensure that any reference to the sustainability characteristics of a product or service is:
(a). consistent with the sustainability characteristics of the product or service; and
(b). fair, clear and not misleading.
Sustainability characteristics are defined as "environmental or social characteristics". More generally, the new rules focus on the "E and "S" but not the "G" in "ESG".
The anti-greenwashing rule applies to all FCA-authorised firms. The FCA indicate that it is consistent with the Consumer Duty’s "consumer understanding" outcome and forms the foundation of our naming and marketing rules for asset managers as well.
2. Sustainability labels
New Sustainability labels will be introduced on 31 July 2024. They apply to managers engaging is "sustainability in-scope business", meaning the following activities:-
(1). managing a UK UCITS; and
(2). managing an AIF which is a UK AIF.
To use a label, the manager must be undertaking sustainability in-scope business in relation to a sustainability product. A "sustainability product" is limited to any of the following:
(1). an authorised fund, including, where the authorised fund is an umbrella scheme, each sub-fund of the umbrella; or
(2). an unauthorised AIF that is a managed by a full-scope UK AIFM or a small, authorised UK AIFM, (subject to certain limited exceptions).
In order to apply the Sustainability labels, the products must meet both general and specific criteria relating to that label on an ongoing basis. Firms must also meet certain requirements and make associated disclosures. The general criteria fall under 5 "key themes":
(i). Sustainability objectives. A sustainability product using a sustainability label must have an explicit sustainability objective to improve or pursue positive environmental and/or social outcomes as part of its investment objectives which aligns with one of the sustainability labels, and is clear, specific and measurable. Firms must identify and disclose whether pursuing the positive sustainability outcomes may result in any material negative outcomes;
(ii). Investment policy and strategy. At least 70% of the gross value of the product’s assets must be invested in accordance with its sustainability objective (subject to certain exceptions). The product’s assets must be selected with reference to a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability (the "Sustainability Standard"); Where the product invests in assets that are not in accordance with its sustainability objective, those assets must not have attributes that conflict with that objective;
(iii). KPIs. Firms must have robust and evidence-based key performance indicators (KPIs) that can demonstrate the product’s progress towards meeting its sustainability objective;
(iv). Resources and governance. Firms must ensure there are appropriate resources, governance and organisational arrangements to support delivery of the relevant sustainability objective;
(v). Stewardship. A firm must identify and disclose the stewardship strategy needed to support the delivery of the sustainability objective, including activities they expect to engage in and outcomes they expect to achieve. Firms must also set out an escalation plan to be able to take action when assets do not demonstrate sufficient progress towards the sustainability objective and/or KPIs.
The four specific sustainability objectives/labels:
(i). Sustainability focus. A manager may only use the "sustainability focus" label where the sustainability product’s sustainability objective is consistent with the aim of investing in assets that are environmentally and/or socially sustainable, determined using the Sustainability Standard.
(ii). Sustainability improvers. A manager may only use the "sustainability improvers" label where the sustainability product’s sustainability objective is consistent with the aim of investing in assets that have the potential to improve environmental and/or social sustainability over time, determined by the potential of those assets to meet the Sustainability Standard.
A manager must, in relation to the use of this "sustainability improvers" label:
(a). identify the period of time by which the product and/or the assets in which the product invests is expected to meet the Sustainability Standard of environmental and/or social sustainability;
(b). identify short and medium-term targets for improvements in the sustainability of the product and/or the assets in which the product invests, commensurate with the investment horizon of the product; and
(c). obtain robust evidence to satisfy itself that the assets in which the product invests have the potential to meet the Sustainability Standard.
(iii). Sustainability impact. A manager may only use the "sustainability impact" label where the sustainability product’s sustainability objective is consistent with the aim of achieving a pre-defined, positive, measurable impact in relation to an environmental and/or social outcome.
A manager must, in relation to the use of the sustainability label "sustainability impact":
(a). specify a "theory of change" (meaning a comprehensive description and illustration of how and why a desired change is expected to occur in a particular context) in line with the product’s sustainability objective, describing how the manager expects its investment activities and the product’s assets to contribute to achieving a positive and measurable impact where the manager considers it appropriate; and
(b). specify a robust method to measure and demonstrate that the manager’s investment activities and the product’s assets are achieving a positive environmental and/or social impact.
(iv). Sustainability mixed goals. A manager may only use the "sustainability mixed goals" label where the product's sustainability objective is to invest in accordance with two or more of the other three sustainability objectives above.
A manager must, in relation to the use of the sustainability "sustainability mixed goals" label:-
(a). identify the proportion of assets which are invested in accordance with each of the two or more of the other three sustainability objectives; and
(b). meet the requirements (a) to (c) (as relevant) in respect of the "sustainability improvers" label mentioned above.
As far as reasonably practicable, a manager must, where it makes use of a sustainability label, use the relevant graphics prescribed by the FCA.
3. Naming and marketing
There will be new naming and marketing rules which apply to products made available to retail investors that do not use one of the labels.
(i). Use of sustainability-related terms in relation to a sustainability product.
A manager that is undertaking sustainability in-scope business for retail clients in relation to a sustainability product must comply with a number of new requirements from 29 July 2024 where the manager uses the following terms (the "Sustainability Terms") in either the sustainability product’s name or in a financial promotion in relation to the sustainability characteristics of that product. The Sustainability Terms are:-
(a). "ESG" (or "environmental, social and governance");
(b). "environment", "environmental" or "environmentally";
(c). "social" or "socially";
(e). "sustainable" or "sustainability";
(h). "net zero";
(k). "sustainable development goals" or "SDG(s)";
(l). "Paris-aligned"; and
(m). any other term which implies that a sustainability product has sustainability characteristics.
A manager may use the Sustainability Terms:-
(a). to make short factual statements which are not financial promotions; or
(b). to make statements in a context not intended to refer to or describe the sustainability characteristics of a sustainability product.
Examples of such circumstances include references to "financial impact" or "economic climate", or a statement about who is ‘responsible’ for providing services in relation to a sustainability product.
(ii). Use of sustainability-related terms in the name of a sustainability product.
These rules apply to two sets of circumstances:
- A manager that uses a sustainability label in relation to a sustainability product may use the Sustainability Terms in the product’s name (provided that where a manager is using a "sustainability focus", "sustainability improvers" or "sustainability mixed goals" label, they must not use the word "impact" in the product’s name; or
- A manager that is undertaking sustainability in-scope business but does not use a sustainability label in relation to a sustainability product may use the Sustainability Terms in the product’s name provided that the following conditions are met:
(1). The sustainability product must:
(a). have sustainability characteristics and a name which accurately reflects those characteristics; and
(b). not, in its name, use the terms "sustainable", "sustainability" or "impact" or any other variation of those terms to refer to the sustainability characteristics of the product.
(2). The manager must also produce:-
(a). a prescribed form of consumer-facing disclosure;
(b). a prescribed form of pre-contractual disclosure (or Part A of a prescribed form of public product-level sustainability report in circumstances where the product does not have pre-contractual materials that relate to it); and
(c). Part B of the prescribed form public product-level sustainability report.
(3). The manager must publish the following information on the relevant digital medium for the business of the manager in a prominent place on the specific webpage or page on a mobile application or other digital medium at which the sustainability product is offered:-
(a). an explanation as to the purpose of a sustainability label, using either the standard text – "Sustainable investment labels help investors find products that have a specific sustainability goal" – or alternative text which reflects the substance of the standard text;
(b). a statement as to the fact that the product does not use a sustainability label, using the text: "This product does not have a UK sustainable investment label"; and
(c). a brief explanation as to why the product does not use a sustainability label.
(iii). Use of sustainability-related terms in financial promotions relating to a sustainability
(a). Where a manager communicates a financial promotion to a retail client in the United Kingdom, they must ensure that any financial promotion relating to a sustainability product is consistent with the sustainability label (if any), the prescribed forms of consumer-facing disclosure, pre-contractual disclosure, and Part B of a public product-level sustainability report relating to that product.
(b). Where a manager is not using a sustainability label in relation to a sustainability product but communicates the Sustainability Terms in a financial promotion relating to that product, it must comply with the requirements at (b)(2) and (3) immediately above.
There are separate, specific rules that apply to feeder funds.
4. Disclosure of sustainability-related information
Part 5 of the new ESG rule comprises rules about Disclosures.
These fall within four categories:-
- Consumer-facing disclosures;
- Pre-contractual disclosures;
- Ongoing product-level disclosures; and
- Entity-level disclosures.
The detail is beyond the scope of this bulletin. Part 5 of the ESG rules sets out prescriptive rules under each of those headings.
The new rules relating to distributors of sustainability products provide:-
(i). that where a distributor distributes to retail clients a sustainability product which uses a sustainability label, they must communicate to those retail clients the same label that the manager undertaking sustainability in-scope business is using in relation to that product by either:
(a). displaying the label on the relevant digital medium for the business of the distributor in a prominent place on the specific webpage or page on a mobile application or other digital medium at which the sustainability product is offered; or
(b). where the distributor does not use a relevant digital medium, using the same channel(s) that the distributor would ordinarily use to communicate information.
They must also ensure that retail clients are provided with access to a consumer-facing disclosure which relates to that product.
(ii). Where a manager does not use a sustainability label but uses one or more of the Sustainability Terms in the name or a financial promotion relating to a sustainability product, they must ensure that retail clients are provided with access to the consumer-facing disclosure which relates to that product.
(iii). A distributor that distributes a sustainability product to retail clients must ensure that its relevant digital medium, or any other channel(s) that they would ordinarily use to communicate information, and any financial promotion relating to that product, are kept updated in accordance with any changes that are made to the relevant sustainability label or to the consumer-facing disclosure which relates to that product.
(iv). A distributor that distributes recognised schemes (individually recognised overseas schemes), including ETFs that are recognised schemes, to retail clients must, where the Sustainability Terms are used in either the name of a recognised scheme or a financial promotion relating to that scheme, prepare a notice which includes the following text: "This product is based overseas and is not subject to UK sustainable investment labelling and disclosure requirements".
In relation to the relevant digital medium for the business of the distributor, it must display the notice in a prominent place on the specific webpage or page on a mobile application or other digital medium at which the recognised scheme is offered, or include a hyperlink to the relevant webpage of the FCA website which sets out for retail clients further information in relation to the sustainability labelling and disclosure requirements under ESG 4 and ESG 5.
In addition, where relevant, in relation to any other channel(s) that the distributor would ordinarily use to communicate information, they must notify retail clients using that means of communication.
Next steps and scope
The FCA say they are proceeding with the rules for UK funds as a starting point and intend to consult on applying the rules to UK portfolio managers in early 2024. They also make clear that the rules only apply in respect of UK firms and products, but they are continuing to work with HM Treasury on the approach to overseas funds. As to other products, the FCA say they will continue work to develop proposals for pensions products and insurance-based investment products in the medium term. They note that the rules prohibit firms and products that are not in scope from using the investment labels and that where out-of-scope products are invested in products that use a label (e.g., a pension product invested in a labelled product), firms must comply with the anti-greenwashing rule and other existing requirements to ensure any marketing and communications about that product is fair, clear and not misleading.