Summary: DP21/4: Sustainability Disclosure Requirements (SDR) and investment labels

The Discussion Paper (DP), DP21/4, maps out the FCA’s current stance in relation to a UK sustainable product labelling system, which will require certain investment products to display a label reflecting their sustainability characteristics, complementing the entity and product-level SDR disclosures. Asset managers and certain FCA-regulated asset owners are within the scope of the DP and thus will be required to report on their sustainability risks, opportunities and impact.

As many UK firms and their products are already subject to the European Union’s (EU) Sustainable Finance Disclosure Regulations (SFDR) in respect of their cross-border EU business, the UK’s SDR aims to remain as consistent as possible with SFDR, while reflecting the needs of the UK market.


Sustainability Disclosure Requirements (SDR):

The measures already taken and/or underway to implement will act as a foundation for the regime and will align with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). SDR will also include disclosure requirements relating to the

The UK Government has confirmed that the global baseline sustainability reporting standards to be developed by the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) will form a core component of the SDR framework, and the backbone of its corporate reporting element.

Sustainable investment labels:

Certain investment products will be required to display a label reflecting their sustainability characteristics to enhance transparency in the interest of consumers and investors. These labels will in turn complement the entity-level and product-level SDR disclosures. More details regarding these policy proposals will be released for consultation in Q2 2022.


FCA’s Approach:

In order for consumers and investors to make informed and effective choices about investment products, one of the potential approaches is a product labelling and disclosure system:

  • Product labels: A standardised product classification and labelling system would help consumers understand the sustainability characteristics of different products and navigate the products on offer.
  • Disclosure layer 1 – Consumer-facing disclosures: Consumer-facing product-level disclosures could provide standardised information on the product’s key sustainability attributes. This would allow consumers to better understand the sustainability characteristics of the product, compare similar products or the same product over time, and hold the provider to account for sustainability claims made.
  • Disclosure layer 2 – Detailed disclosures aimed at institutional level: Detailed disclosures could be made at entity and product level. These could provide more granular information than the consumer-facing disclosures, as well as additional information as relevant. The disclosures could be useful to institutional investors, as well as a broader range of stakeholders such as policymakers, regulators, and NGOs.


The indicative mapping of the categories set out in the SDR against SFDR could provisionally be as follows:


UK SDR Classification EU SFDR Classification
Not promoted as sustainable Article 6
Responsible and Sustainable

‘Transitioning’ categories

Article 8

Sustainable ‘Aligned’

Article 9


Sustainable ‘Impact’

A category comprising only a (small) subset of Article 9 funds


In terms of detailed disclosures, the FCA explains that at the product level these could include, for example, information on methodologies used to calculate metrics, information on data sources, alignment with the , further supporting narrative, and information about benchmarking and performance (see classification criteria below). At entity level, the FCA intends to build upon its proposed TCFD-aligned disclosure requirements for asset managers and asset owners.

Product-level classification Minimum criteria
Sustainable – Impact – Products with the objective of delivering net positive social and/or environmental impact alongside a financial return. Intentionality, theoretical ability to deliver and measure additionality through investment decision-making and investor stewardship, impact measurement and verification.
Sustainable – Aligned – Products with sustainability characteristics, themes or objectives and a high proportion of underlying assets (measured according to a minimum threshold) that meet the sustainability criteria set out in the UK Taxonomy Evidence of sustainability characteristics, themes or objectives that are reflected fairly and consistently in the investment policy or strategy and may include some combination of:

•         restrictions to the investible universe, including investment limits and thresholds

•         screening criteria (positive or negative)

•         the application of benchmarks or indices and expected or typical tracking error relative to the benchmark

•         the entity’s stewardship approach as applied to the product

Sustainable – Transitioning – Products with sustainability characteristics, themes or objectives that do not yet have a high proportion of underlying assets meeting the sustainability criteria set out in the UK Taxonomy.
Responsible – Impact of material sustainability factors on financial risk and return considered to better manage both risks and opportunities and deliver long-term, sustainable returns. No specific sustainability goals. ESG integration, evidence of ESG analytical organisational capabilities and resources, demonstrable stewardship.
Not promoted as sustainable – No specific sustainability goals and sustainability risks have not been integrated into investment decisions.


DP21/4 – Key takeaways for fund managers:

The FCA will consider further the scope of the SDR requirements. It notes that its proposed TCFD-aligned disclosure rules recognise that many UK firms operate on a global basis, and will allow firms the flexibility to make disclosures at the level they find most useful for clients and consumers. This acknowledgement shows that many firms are already making TCFD-compliant disclosures voluntarily at group level. One important consideration for firms in scope will be whether the FCA ultimately expects the SDR entity-level disclosures to be applied at the same level of consolidation as TCFD disclosures, or whether firms will have the option to limit this to UK entities.

Firms in scope of the SDR would be expected to embed the principles in DP21/4 and strategy for positive change: our ESG priorities into their product design and subsequent disclosures.

In line with the approach taken by SFDR, the FCA expect in-scope product providers to determine the correct categorisation for their products, according to criteria that will be developed and consulted on in due course. The FCA may challenge firms’ claims during their regulatory engagement with them, for example at the gateway when authorising new funds, and on an ongoing basis through supervisory dialogue.

The FCA is also liaising with HM Treasury to consider how overseas funds marketing into the UK should be treated as the EU SFDR is somewhat vague on the issue.

Ultimately, the SDR framework for the sustainability disclosures, supported by product labels will aim to:

  • increase the provision of sustainability-related financial information to consumers and other stakeholders;
  • build trust in the market for ESG and sustainable investment products by combatting potential ‘greenwashing’ (where sustainability claims made by firms do not bear scrutiny);
  • and enabling consumers to make informed choices;
  • play a role in educating consumers about sustainable investing and the different sustainability-related characteristics of products;
  • foster competition by more reliably distinguishing products;
  • encourage better management of sustainability risks, opportunities and impacts across the financial system;
  • support market demand and innovation for greater investment in responsible and sustainable investment strategies, and;
  • reduce market fragmentation by establishing clear categories for sustainable investment products.