Draft rules for the UK’s Sustainability Disclosure Regime published

What is the new development?

The long-awaited (and much delayed) FCA consultation on the UK’s Sustainability Disclosure Regime (SDR) and investment label regime has been published. The proposed rules introduce an ‘anti-greenwashing’ rule, alongside a sustainability labelling regime and prescribed disclosures.

Who does it impact?

The draft rules will impact asset managers and distributors of investment funds, with the more onerous requirements affecting funds with sustainability-related claims or a sustainability objective, and firms who market ‘in-scope’ products to retail customers. However, all regulated firms will be subject to a new ‘anti-greenwashing’ rule.

‘in-scope products’ include:

• UK authorised funds

• UK AIFs

• Portfolio management / discretionary management services

What do firms need to do?

Whilst CP22-10 is a consultation and there is room for deviation in the final rules, given the time and resources put into developing these proposed rules, we don’t expect FCA to make material changes to the policy statement and final rules. With that in mind, we encourage firms to familiarise themselves with the proposals, which are summarised below, and how they might be impacted.

In particular, firms already subject to the EU’s SFDR will want to assess how their funds are likely to be categorised under the UK regime and identify where any similarities or differences exist. Annex 1 of the consultation paper will be particularly helpful in this regard.

What are the changes?

Broadly, the proposed rules cover the following elements:

• A sustainability labelling regime:

  • Firms can opt to apply one of three sustainability labels where the fund has a sustainability objective. The three labels are: (1) sustainability focus, (2) sustainability improver and (3) sustainability impact. In order to qualify to use a particular label, detailed eligibility criteria must be met. For example, 70% of the assets of fund with a  ‘sustainable focus’ must meet a ‘credible standard’ of E/S sustainability.

• Consumer disclosures:

  • FCA are introducing consumer-friendly disclosures that are subject to prescriptive content and format requirements. These disclosure requirements will apply to all in-scope products, regardless of whether sustainability-claims are made or not and are likely to be made in a separate document alongside existing disclosures (such as the PRIIPs KID). Product disclosures are expected to cover topics including: product label; sustainability goal; sustainability approach; ‘unexpected investments’; sustainability metrics; sign-posting to other disclosures.

• Pre-contractual disclosures:

  • All products with sustainability-related features as an integral part of the investment policy or which opt to use a sustainability label will be required to make pre-contractual disclosures. Pre-contractual disclosures will set out the sustainability-related features of the product and are expected to be made within existing disclosures, such as in the fund prospectus or prior information disclosures (FUND 3.2).

• Public product-level sustainability reports:

  • Authorised funds and unauthorised AIFs that are listed on an exchange (e.g. investment trusts) that opt to use a sustainability label must disclose ongoing sustainability-related performance information in a public product report.

• On-demand product-level reports:

  • Where public disclosure is considered inappropriate, such as for portfolio management services or unauthorised / unlisted AIFs, firms must instead provide ongoing sustainability-related performance information direct to clients upon request.  

• Entity sustainability reports:

  • FCA plan to build on their TCFD disclosure rules and require in-scope firms to  disclose how they are managing sustainability-related risks and opportunities in an ‘entity sustainability report’. These disclosure requirements apply regardless of whether the firm opts to use sustainability labels for its products. However, the same exemptions apply as under the TCFD rules so asset managers with less than £5bn AuM will not be subject to this requirement.  

When do the changes come into effect?

The policy statement is expected in June 2023, with different elements of the regime entering into force either on that date, or 12 to 36 months later.

Please get in touch if you’d like to discuss how these proposals are likely to impact you.