Sustainability Disclosure Requirements (SDR) and investment labels: the new rules

A blanket rule applicable to all FCA-authorised firms, but arguably the rule itself is just making explicit what was already implicit in existing "fair, clear and not misleading" rules. It is to be supported by guidance (currently in draft) which is retail-focused.

Naming and marketing rules

Retail-specific rules picking up a theme already seen in the EU – ensuring that sustainability terms in product names and marketing documents are backed by some substance and are not mere greenwashing.

Voluntary labels

A flagship product labelling regime. Here, the UK is going further than the EU has gone to date. But, importantly, whilst labels can be used by non-retail funds, they can only be used by UK managers of UK funds – not, for example, by managers of non-UK funds marketing in the UK. The FCA reiterated in its recent consultation on implementing the Overseas Funds Regime that it is working with HM Treasury to understand the options for extending the SDR to overseas recognised schemes.  The criteria for using the labels are detailed and are set out in the Appendix. 

Product-level disclosures

Requirements on UK managers of – retail or professional – UK labelled funds, or UK retail funds which are unlabelled but use ESG terms in their naming or marketing documents, to expand TCFD product-level reports (which only concern climate-related financial risks) to disclose information on the sustainability characteristics of the product.

For further detail, see section 3 below.

Entity-level disclosures

Requirements on UK managers of – retail or professional – UK funds to expand TCFD entity-level reports (which only concern climate-related financial risks) to cover sustainability risks and opportunities more broadly.  

For further detail, see section 4 below.

Distributor rules

Requirements on FCA-authorised firms to make limited disclosures when distributing UK labelled funds, or UK (and limited overseas) funds which are unlabelled but use ESG terms in marketing documents, to retail investors.

Portfolio management

In a change from the consultation, provisions in respect of portfolio management have not been included in the final rules. The FCA will be consulting on extending the regime to portfolio management in "early 2024". Whether "portfolio management" for these purposes will, as per the original SDR consultation, have the same extended meaning as under the TCFD-aligned rules in the ESG sourcebook (which captures PE-style advisory activities, for example) will be key for many firms. Although we will need to wait to see the details of the consultation, it appears that the FCA will be focusing on services undertaken for UK retail clients, including managed portfolios and discretionary wealth management services.

Overseas funds 

The FCA says that it is working with HM Treasury in exploring ways to extend the regime to overseas recognised schemes. This could include those marketing under the forthcoming Overseas Funds Regime (OFR) - i.e. non-UK funds registered in the UK for marketing to retail investors. The FCA has reiterated this intent in its recent OFR consultation (CP23/26). It therefore remains to be seen how broad an extension to overseas funds might be – for example, whether overseas funds registering for marketing in the UK could ever be allowed to use the labels and, if so, under what conditions. 

Pensions and insurance-based products

The FCA has said it will continue to work on proposals for other investment products, including pensions and insurance-based products, with the Department for Work and Pensions and The Pensions Regulator, but these are not expected imminently.

The final rules reflect the proposals that the FCA had consulted on, with a tiered approach to product-level disclosures:

(a)     Consumer-facing disclosures

(b)     Pre-contractual sustainability disclosures

(c)     Ongoing public product-level sustainability disclosures

(d)     'On-demand' product-level sustainability information.

A. Consumer-facing disclosures

The aim of these disclosures is to provide key, standardised sustainability information for consumers to make investment decisions. They should be contained in a standalone document no longer than 2 pages. The FCA has deliberately not produced a template but continues to encourage the industry to produce one.

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.

The disclosures should be made in either the prospectus (to the extent one is produced), information document produced pursuant to FUND 3.2 (e.g. AIFs managed by a full-scope AIFM) or "Part A" of a public product-level sustainability report (e.g. small authorised UK AIFM).

C. Ongoing public product-level sustainability disclosures

UK managed authorised or listed funds making sustainability-related pre-contractual disclosures must prepare, on an annual basis, "Part B" of a public product-level sustainability report. The report is intended to provide details of the sustainability performance of the product.

D. 'On-demand' product-level sustainability information

The rules recognise that in some instances public product level reporting would not be appropriate and that instead eligible investors (those who need information to satisfy their own sustainability-related disclosure obligations) should be able to request equivalent information "on-demand". That said, guidance encourages managers to consider providing the requisite information to a person that requests it even if they are not technically eligible.

The obligation to provide on-demand information clearly applies to funds using a label (to the extent that Part B of a public product-level sustainability report is not required), but the scope of application to other products is not entirely clear on the face of the rules. The consultation paper contemplated the obligation also applying to products which have "sustainability-related features that are integral to their investment strategy". But the final rules are more open than this.

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).

Firms should assess the scope of the regime carefully. FCA authorised firms who market non-UK funds to professional investors in the UK will, for now, only be affected by the new anti-greenwashing rule which will come into force on 31 May 2024. Firms should review and update their investor communications as appropriate.

Firms with UK retail funds will have a bigger lift, 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. FCA approval, or even in some cases investor consent, may be required in order to make the necessary changes.

There are various other requirements not detailed in this briefing which apply to those firms whose fund satisfies the general and specific qualifying criteria and who choose to use a relevant label, including prior notification to the FCA, adoption and publication of the FCA's trademarked graphic (obtainable through the FCA's online notification system), periodic review and record-keeping.

Firms should also monitor for the upcoming consultations on extending the regime, in particular, to portfolio managers and overseas funds.

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.