After much speculation, PS23/16 was finally unveiled on 28 November 2023. As consumer demand for sustainable investment products increases, the Financial Conduct Authority (“FCA”) recognises the need for investors to have confidence in these products and services. The sustainable finance market is not without controversy, with some firms reportedly making false or exaggerated claims about their products’ Environmental, Social and Governance (“ESG”) impact. This practice, known as greenwashing, undermines consumer trust and strains the transition towards a sustainable economy.
In this article, we cover the scope of the new rules, what firms must do to prepare, and the timeline ahead for implementation.
Crack down on greenwashing
To address this issue, the FCA has announced new Sustainability Disclosure Requirements (“SDR”) for all authorised firms, which will come into effect from April 2024. These rules aim to help consumers make informed choices about sustainable investment products, and prevent greenwashing by ensuring that firms provide clear, accurate, and consistent information about their product’s sustainability features and objectives.
A summary of the new rules
The FCA announced five new sustainable requirements for authorised firms:
- An anti-greenwashing rule that requires all FCA-authorised firms to ensure that any sustainability-related claims they make are fair, clear and not misleading. The FCA will also provide guidance on how firms can comply with this rule and avoid common pitfalls.
- Naming and marketing rules for investment products that specify how firms can use sustainability-related terms, such as ‘green’, ‘ESG’, or ‘sustainable’, in their product names and marketing materials. These terms should reflect the product’s features and objectives and should not mislead or confuse retail consumers.
- A labelling scheme for investment products that introduces four optional labels based on the product’s sustainability characteristics and objectives. The labels are:
- Sustainability Focus- at least 70% of the product’s assets meets the credibility standard for environmental sustainability
- Sustainability Improvers- products that are not currently sustainable, but are on a path to improving their sustainability for the environment over time
- Sustainability Impact- products that directly contribute to sustainability objectives
- Sustainability Mixed Goals- where a mixture of sustainability objectives (and labels) is present in a product
These labels will help consumers compare and choose products that match their preferences and expectations. The labels will also indicate the level of impact of the product, and the degree of alignment with the UK’s net zero target. It is important to note that in theory and in practice, one label is not ‘better’ than the other; the key purpose is to give consumers clarity.
- Disclosure requirements for investment products that require firms to provide consumers with more accessible and more comparable information about the key sustainability features of their products.
There will be two types of disclosures:
- Consumer Facing disclosures to summarise a product’s key sustainability characteristics
- Detailed disclosures
Within detailed disclosures, all products using a label or sustainability-related terms must include pre-contractual disclosures and ongoing sustainability-related performance information. Additional detailed entity-level disclosures will apply to all asset managers with AUM above £5 billion, who must produce a sustainability entity report detailing how they manage sustainability risks and opportunities.
- Requirements for distributors of investment products that ensure the product information, including the labels, is made available to retail consumers and that they consider the sustainability preferences of their professional clients. Distributors will also need to provide appropriate advice and guidance to consumers on sustainable investment products.
The new rules will apply from the 1st of April 2024, with transitional arrangements for existing products. The FCA will monitor and enforce the enhanced ESG regime, updating it as needed.
Who is caught?
The new anti-greenwashing rule applies to all UK authorised firms.
UK asset managers and distributors must follow the new labelling rules, dubbed the fund labels, as well as the new disclosure requirements. In addition, distributors must comply with their specific SDR requirements.
The SDR does not currently apply to overseas funds. However, the FCA has already shared its plans to extend the regime to all products marketed in the UK, including those under the Overseas Funds Regime. The FCA also plans to include pension funds and portfolio management products. With a focus on consumer protection and sustainability, all investment products marketed into the UK can expect to eventually fall within the regime’s scope.
Timeline of the FCA’s new sustainability measures for firms
To adequately prepare for the new ESG regulatory regime, authorised firms should consult the following timeline.
28 November 2023: the FCA sustainability rules are published.
1 April 2024: the new regime applies to all new products launched on or after this date. Authorised firms can start using the labels for new products that meet the criteria.
31 May 2024: The anti-greenwashing rule comes into force.
31 July 2024: The naming and marketing rules for asset managers come into force.
1 October 2024: disclosure requirements apply to all existing products that are still open for investment on or after this date.
1 April 2025: requirements for distributors apply to all new and existing products that are subject to the disclosure requirements and/or the labels.
What must firms do now?
All FCA authorised firms need to prepare for the first SDR deadline on the 1st of April 2024, by ensuring that all new products comply with the relevant rules. Firms should consult the FCA’s guidance on the new anti-greenwashing rule by the 31st of May 2024 to help them prepare for this.
For existing products, each new rule has been staggered across the implementation timeline above, giving UK asset management firms and their distributers more time to adequately prepare for the SDR.
To prepare, asset managers and distributors must coordinate relevant implementation deadlines. For example, consumer-facing disclosures will need to be published at the same time as new product labels. Additionally, these must comply with new marketing rules. The FCA has stated that they expect asset managers to meet their new SDR requirements by the deadlines, which means that preparation is key.
The FCA’s PS23/16 represents a pledge to sustainable finance and ESG. Authorised firms must ensure that they comply with the new regime by the relevant deadlines. The FCA has made it clear that they will take enforcement action on any firm found in breach of the Sustainability Disclosure Requirements.
How Complyport Can Help
Having to navigate the ever-evolving SDR landscape within the financial services sector can be time-consuming. At Complyport, our team anticipates and closely follows the FCA’s new proposals. When the Policy Statement is released in Q4, the team at Complyport will be ready to offer your firm a tailored and flexible approach to fit your firm’s needs and support our clients with any questions they may have regarding this or any new regulatory updates moving forward, specifically within the sustainability sector. Our team can offer:
- SDR/ESG Readiness Assessments
- SDR/ESG Review against categories
- Policy and procedure updates
- Ongoing support for any questions regarding the new regulations
- SDR/ESG Training
Please contact Thomas Salmon for any questions and assistance regarding the updated regulatory standards to Sustainability Disclosure Reporting via email at thomas.salmon@complyport.co.uk to book in a free consultation.
