Sustainability Community

3 weeks ago the FCA published the SDR Policy Statement following their consultation. 

Here is a summary of the different components to the Policy Statement .

• Anti-greenwashing rule applies from May 2024
• Opt-in labelling regime: 3 Product categories (label / no label / other):
• Disclosures: Consumer facing product level disclosures, pre-contractual disclosures (label / no label), periodic disclosures (label / no label), management entity disclosures
• New naming and marketing rules

Key dates are in yellow highlight.

3 product categories:

	Labelled (L)	Non-Labelled (NL)	Other
Description	Opt-in for a label Sustainability Focus Sustainability Improvers Sustainability Impact Sustainability Mixed Goals	Use sustainability terminology in name or marketing	Not using sustainability in name or marketing
Alignment	70% aligned with sustainability objective (all labels)	70% aligned with sustainability objective (only if ESG-related name) Cannot have 'Sustainable' in the name of the fund	No restrictions
Disclosures	Consumer facing Pre-contractual Periodic	Consumer facing Pre-contractual Periodic "No label" statement	No specific disclosures (BUT cannot use ESG in name or marketing)
Applies from	31 July 2024 (first opt-in date). Can opt-in after this date.	Applies from 2 Dec 2024.
Documentation Deadlines	Consumer facing (31 July 2024+) Pre-contractual (31 July 2024+) Periodic (12m after label assigned)	Consumer facing (2 Dec 2024) Pre-contractual (2 Dec 2024) Periodic (12m from when sustainability-related terms are first used) "No label" statement (2 Dec 2024)

1. Which products are in scope?

• • UK authorised funds (UCITs & AIFs)

2. Anti-greenwashing rule

• • • Consistent with E/S characteristics
    • Fair, clear and not misleading
    • First rule to come into play.
    • Applicable to all FCA registered firms
    • Any sustainability-related claims in any communication must be:
    • Applies from: 31 May 2024

3. Product Labels (see Appendix 1)

• • Opt-in regime
  • Overarching principles around which the label criteria are structured:

• Sustainability Objective
• All products using a label must have a sustainability objective to improve or pursue positive environmental and/or social outcomes as part of their investment objectives.
• Sustainability Objective: Must be clear, specific & measurable as part of the products investment objectives.
• Investment Policy & Strategy
• At least 70% of products assets must be invested in accordance with its sustainability objective (reference robust, evidence-based standard that is an absolute measure of E/S sustainability)
• Determined using the robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability
• KPIs
• Must identify KPIs to measure progress against the sustainability objective (measure progress of whole product / individual assets).
• Resources & Governance
• Must ensure there are appropriate resources, governance & organisational arrangements to support delivery of the sustainability objective.
• Stewardship
• Identify & disclose stewardship strategy needed to support delivery of sustainability objective, including activities they expect to take, and outcomes expect to achieve.
• MUST set out escalation plan to be able to take action when assets do not demonstrate sufficient progress towards sustainability objective / KPIs.
• Applies from: 31 July 2024 (first opt-in date). Can opt-in after this date.

• • The labels:
• Sustainability Focus
  • Focus on sustainability for people or the planet
  • Determined using the robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability
    
• Sustainability Improvers
  • Assets that may not be sustainable now, with an aim to improve their sustainability for people or the planet over time.
  • Firms must develop short- and medium-term targets for improvements - should be consistent with the investment horizon for the product.
• Sustainability Impact
  • Invest in solutions to sustainability problems, aim to achieve positive impact for people or the planet.
  • Measurability can be quantitative or qualitative, as long as robust and details of the impact achieved are clearly disclosed.
• Sustainability Mixed Goals
  • Invests in a mix of assets that either focus on sustainability, aim to improve their sustainability overtime, or aim for positive impact.
  • Multi-asset fund / fund of funds focus.
    

Disclosures

• Consumer facing document
  • For products sold to retail customers (products using sustainability label or using sustainability-related terms in their naming & marketing)
  • Applies from date a label is first used (31 July 2024 earliest) / products without a label (2 December 2024)
• Product level
  • Pre-contractual disclosures in fund prospectus
  • Applies from date a label is first used (31 July 2024 earliest) / products without a label (2 December 2024)
• Ongoing reporting
  • Annual disclosures
  • Disclosure on progress & KPIs / metrics & performance.
  • Applies annually, after 12m from date on which label is first used / 12m from when sustainability-related terms are first used (Earliest reports 31 July 2025).
• Entity-level disclosures
  • Disclosure on firm-level governance, risk management, strategy, metrics & targets (build on TCFD)
  • May be useful to include other reporting frameworks e.g., TNFD, ISSB, SASB, GRI.
  • Firms using labels & those using sustainability related terms in their product names and marketing need including.
  • Applies from 2 Dec 2025 (larger firms) / 2 Dec 2026 (smaller firms), then annually

5. Naming & Marketing Rule

• • Terminology: ESG, environment, social, climate, sustainable, green, transition, net zero, impact, responsible, SDGs, Paris-aligned, any other term which implies that a product has sustainability characteristics.
  • Firms can use sustainability-related terms in product names & marketing IF either:

1.    They use a label
2.    They meet new product name, disclosure, and statement conditions (conditions include clarifying that the product doesn't use a label and why)

• Don't apply when firms are making short, factual, non-promotional statements about a product.
  • e.g., to describe 'economic climate' or 'financial impact.'
• Non-Labelled Funds:
  • Sustainability terms IN NAME
    • Products MUST have sustainability characteristics
    • 70% alignment of investments
    • CANNOT use "sustainable" or "impact" in name
    • Similar disclosures for labelled products
    • "No label" statement
  • Sustainability terms IN MARKETING
    • Similar disclosures for labelled products
    • "No label" statement
  • Applies from 2 Dec 2024.
    

Would be great to hear your views on your next steps with the regulation...

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Francesca Wheble
Responsible Investment Analyst
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Good summary Francesca

Plus don't forget Distributor rules - which bring into scope all UK discretionary portfolio management, investment advisory/IFAs, and execution only FCA regulated businesses as 'distributors' fund purchases to retail clients for UK Products (funds) using a Sustainability Label, and those using 'sustainability related terms' in their names i.e Non-labelled funds (see ESG Rule 4.1.16-19 and 4.3.2): 

When:

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James Doyle
Director, Green Finance, Investment Management
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