SDR and investment labels: extension of the regime to UK portfolio managers

On 23 April 2024, the FCA published CP24/8: Extending the SDR regime to Portfolio Management. The consultation will close on 14 June 2024.

In November 2023, the FCA had published a policy statement setting out its rules for the new Sustainability Disclosure Requirements (SDR) regime, including a set of consumer-friendly investment labels. Our briefing is here. With the exception of the "anti-greenwashing rule", which will apply to all FCA-authorised firms from 31 May 2024, the finalised rules confirmed the introduction of the regime, on phased implementation dates, to apply initially only to UK asset management firms (UCITS managers and AIFMs) that manage UK-domiciled funds. At the time, portfolio management was excluded (as were overseas funds).

The FCA is now consulting on extending that regime to portfolio management of sustainability products.

By and large, the FCA has sought to align the requirements applicable to portfolio managers with those that are going to apply to asset managers. This "level playing field" means that portfolio managers will, for the most part, and subject to the detailed application provisions, be subject to the same rules in substance as those that apply to asset managers – many of the rules will come into force on 2 December 2024, perhaps rather sooner than originally mooted. This may suit some portfolio managers (and, indeed, the FCA suggests that some portfolio managers had asked for this) but for others who may have relied on having more time to prepare, this puts the pressure on.

The regime, as extended, is broken down into a series of modules (set out below), some of which interact with one another. The implementation of these will be phased, as indicated. As we previously mentioned, many of the requirements build on the existing TCFD-aligned disclosure requirements under the ESG sourcebook.

As with the existing TCFD-aligned rules in the ESG sourcebook, the term "portfolio management" will have an extended meaning for the purposes of the SDR and labelling rules. The first "limb" is as one would expect: it covers managing investments (i.e. the regulated activity, under article 37 of the Regulated Activities Order, of managing assets belonging to another person in circumstances involving the exercise of discretion). The second "limb" extends to private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities.

So while the first limb captures segregated portfolio managers and – the FCA's particular focus – wealth managers, under the second limb adviser/arrangers will also be caught, at least on the face of it.

In the context of portfolio management there will be a specific meaning of "sustainability product": an agreement or arrangement under which a firm provides portfolio management unless the client is, broadly put, outside the United Kingdom or is a fund, or an AIFM or management company for or on behalf of a fund. The proposed rules apply only to portfolio management in relation to sustainability products.

It follows from the above that arrangements under which a UK portfolio manager (in the extended sense) provides services to clients outside the UK will be out of scope. Further, services that a segregated portfolio manager provides to an AIFM or management company for and on behalf of a fund (wherever the fund manager and/or fund are based) will also be out of scope.

So, who will be caught?

In-scope:

• Managers providing segregated portfolio management services to UK clients normally resident in the UK or with their registered office (or head office) in the UK (except where the client is a UK fund, or UK AIFM or UK management company on behalf such fund) – e.g. pension funds, insurance companies, individual wealth management clients.
  
  
• Private equity adviser/arrangers providing their advisory services on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities on a sub-advisory basis to other UK-regulated investment managers.

Out of scope:

• Managers providing segregated portfolio management services to clients that are based overseas (i.e. individuals who normally reside outside the UK or entities that have their registered office (or head office) outside the UK).
  
  
• Managers providing segregated portfolio management services to a client (wherever based) that is a fund, or an AIFM or management company on behalf of a fund – i.e. where the portfolio manager acts as delegated discretionary investment manager.
  
  
• Adviser/arrangers providing their private equity/private market advisory services to their clients (wherever based) that are funds, or AIFMs or management companies on behalf of such funds.

On the face of it, despite the extended scope of the definition of "portfolio management", adviser/arranger firms should not be caught by the extension of the SDR and labelling regime unless and to the extent that they are providing advisory services to a UK-based investment managers – e.g. on a sub-advisory basis. The more usual fact pattern of providing advisory services to their affiliated, offshore AIFM is excluded.

There is an argument that all portfolio management services are outside the scope of ESG 4 on the basis of the drafting of the draft rules in the consultation paper. That would mean such firms are not subject to the labelling, naming and marketing rules, and would also exclude them from the anti-greenwashing rules. That reading conflicts with the narrative in the consultation and we expect that this point will be clarified in the final rules.

There are three types of product-level disclosures that may be relevant to portfolio managers, subject to the detailed scope and application provisions of the regime noted above.

A. Consumer-facing disclosures

These aim of these disclosures is to provide key, standardised sustainability information for consumers to make investment decisions. They are only required in the case of the portfolio manager's retail clients. They will be required from 2 December 2024 in relation to a portfolio manager's labelled products and its non-labelled products which use ESG terms in their naming and marketing. They should be provided alongside other key investor information and (like the requirements for asset managers) must be contained in a standalone document no longer than 2 pages and, where relevant, no more than "one mouse click away" from where the label is presented. The information should include (among other things):

• Either the sustainability objective (clearly identified as the "sustainability goal" for the product) and the product label, or a statement making it clear that the portfolio management offering does not have a label.
  
  
• The portfolio manager's investment policy and strategy (clearly identified as the firm's "sustainability approach") including details of what the relevant portfolio will and will not invest in.
  
  
• A summary of the relevant KPIs and/or metrics (clearly identified as the firm's "sustainability metrics") calculated using the most up-to-date data available at the time.
  
  
• Details (including, where appropriate, hyperlinks) as to where the retail client can easily access other relevant sustainability and non-sustainability-related information.
  
  
• For the "Sustainability Mixed Goals" label only (if relevant), the proportion of the portfolio management product's assets which are invested in line with each of the other relevant labels (see above as to what constitutes "assets" in this context).

As with all product-level reporting, portfolio managers must make their consumer-facing disclosures available either by publishing them in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. It is likely that most in-scope portfolio managers will elect to use the latter approach.

The FCA has deliberately not produced a template but continues to encourage the industry to produce one.

When previously consulting, the FCA had proposed that portfolio managers would not be required to produce their own consumer-facing disclosures and would instead have to provide an index of the underlying funds in which their portfolios are invested including the label and a hyperlink to the consumer-facing disclosure in respect of the relevant fund. However, since the FCA's latest consultation proposals require portfolio managers specifically to assess their portfolios against the relevant criteria themselves, they will now be required to produce their own consumer-facing disclosures for retail investors.

Portfolio management firms should consider how their consumer-facing (and other) disclosures are compliant with the Consumer Duty, particularly the consumer understanding outcome. This is likely to require firms to test, monitor and, if necessary, adapt their consumer facing disclosures.

B. Pre-contractual sustainability disclosures

These disclosures aim to provide more detailed sustainability information than that contained in the consumer-facing disclosures. These are intended for retail investors who want more information, or (if relevant) for institutional investors.

As regards all product-level reporting including pre-contractual disclosures in-scope portfolio managers must either publish in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. Because portfolio managers are either required to publish their disclosures or to provide it "privately" direct to clients, they have not been made subject to the "on demand" regime that is available to certain fund managers (unauthorised AIFs managed by full-scope UK AIFMs or small authorised UK AIFMs, which are not listed on a recognised investment exchange).

For offerings using a label, the information to be disclosed is broadly associated with the qualifying criteria for using the relevant label; for offerings not using a label, the disclosures must include as a minimum information relating to the investment policy and strategy, together with relevant metrics.

C. Ongoing public product-level sustainability disclosures

In-scope portfolio managers making sustainability-related pre-contractual disclosures (see above) must also prepare, on an annual basis, "Part B" of a "public product-level sustainability report". The first such report will become due from 2 December 2025 (whether the product is labelled or non-labelled products but with ESG terms used in naming or marketing). The report is intended to provide details of the sustainability performance of the product.

As regards all product-level reporting including ongoing product-level disclosures in-scope portfolio managers must either publish in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. In the latter case, although the content of the disclosure must be in keeping with the requirements applicable in the case of a public product-level sustainability report, the information will not be made public.

This report focuses on sustainability-related risks and opportunities. It builds on existing TCFD-derived requirements and follows the same 4-pillar approach adopted by the TCFD and ISSB on governance, strategy, risk management, and metrics and targets. Additional requirements apply where a firm has a product in respect of which product-level disclosures are being made.

The rules expressly refer to the fact that a number of global standards may be relevant in helping firms to determine what they should disclose: the TCFD's supplementary guidance for asset managers, the IFRS sustainability disclosure standard (i.e. IFRS S1), the SASB Standards and the GRI Standards (although firms are discouraged from attempting "line by line" disclosures).

The rules – which are the same as those for asset managers – will apply to all portfolio management firms with over £5 billion assets under management. The first annual report for portfolio managers with over £50 billion AUM will be required by 2 December 2025. Other in-scope portfolio managers will have until 2 December 2026 to produce their first sustainability entity report.

Portfolio management firms should assess the scope of the regime carefully. They will, of course, be subject to the new anti-greenwashing rule which will come into force on 31 May 2024. Beyond that, however, the scope of the extension of the SDR and labelling regime to portfolio management firms is limited, as set out above.

Firms should review and update their investor communications as appropriate. Firms should also monitor for the upcoming HM Treasury consultation on extending the regime to cover overseas recognised schemes.

UK firms with portfolio management offerings to retail clients will likely have more to do, particularly if those products have sustainability related terms in their names. The deadline for making such products compliant with the applicable minimum requirements is 2 December 2024. 

If you would like further information or assistance in understanding the proposals, please speak to your usual Travers Smith contact or any of the individuals below.