The UK’s final Sustainability Disclosure Requirements (SDR) rules, published by the FCA on 28 November 2023 in PS23/16, introduce four voluntary investment labels, new naming and marketing rules and an anti-greenwashing rule. They are the UK’s response to greenwashing in fund ranges and they land in stages from May 2024, with the first deadline applying to every authorised firm, whether or not it ever uses a label.
What are the Sustainability Disclosure Requirements?
The Sustainability Disclosure Requirements are a package with four parts: an anti-greenwashing rule for all FCA-authorised firms, a voluntary set of investment labels, naming and marketing rules for products that use sustainability-related terms, and disclosures at product and firm level. It follows the FCA’s consultation, CP22/20, from October 2022, and the final rules have moved on in several ways in response to the feedback the FCA received.
What is the FCA anti-greenwashing rule?
The anti-greenwashing rule applies to every FCA-authorised firm, not only to funds with labels or to investment managers. From 31 May 2024, any sustainability-related claim a firm makes about its products and services must be consistent with their sustainability characteristics and be fair, clear and not misleading.
Alongside the policy statement the FCA published draft guidance on the rule, GC23/3, which is out for consultation with comments due by 26 January 2024.
What are the four SDR labels?
Labels are voluntary, and products that use one must meet qualifying criteria. There are now four, up from three in the consultation, and they’ve been renamed from “sustainable” to “sustainability” to reflect the fact that some assets are on a journey:
- Sustainability Focus: for products investing mainly in assets that are environmentally and/or socially sustainable.
- Sustainability Improvers: for products investing in assets that aim to improve their sustainability over time.
- Sustainability Impact: for products investing in solutions to problems affecting people or the planet, with the aim of making a positive, measurable contribution to sustainable outcomes.
- Sustainability Mixed Goals: a new label for products that combine the other strategies.
Whichever label a product uses, at least 70% of its assets must be invested in line with its sustainability objective. Firms must also have an appropriate stewardship strategy, identify key performance indicators and keep the label under review.
What do the SDR naming and marketing rules require?
This is the part many existing ranges are likely to feel most. Products that use sustainability-related terms in their names must have sustainability characteristics that are material to the product, which FCA guidance explains as meaning, for example, that at least 70% of assets have those characteristics, and the name must reflect those characteristics accurately.
The terms “sustainable”, “sustainability” and “impact” are reserved for products that use a label. Other terms, such as “ESG” or “green”, can still be used without a label, but those products must meet the naming and marketing rules and prominently publish a statement explaining that they don’t have a label, and why.
Disclosures
The disclosure requirements work at several levels:
- Consumer-facing disclosure: a short, plain English document setting out the product’s sustainability goal, approach and metrics, required for labelled products and for unlabelled products that use sustainability terms.
- Pre-contractual and ongoing product disclosures: more detailed information in the prospectus and in an annual sustainability product report.
- Entity-level disclosures: a firm-level report on how sustainability risks and opportunities are managed, starting with the largest firms.
- Distributors: firms distributing to UK retail investors must pass on labels and consumer-facing disclosures, and add a notice to the overseas funds they distribute explaining that they aren’t covered by the UK regime.
The SDR timeline
- 28 November 2023: PS23/16 is published and the GC23/3 consultation opens
- 26 January 2024: the GC23/3 consultation closes
- 31 May 2024: the anti-greenwashing rule comes into force
- 31 July 2024: firms can start using labels, with consumer-facing and pre-contractual disclosures
- 2 December 2024: the naming and marketing rules apply to unlabelled products using sustainability terms, along with their disclosures, and distributors‘ notices on overseas funds apply
- 2 December 2025: entity-level disclosures begin for firms with assets under management above £50 billion
- 2 December 2026: entity-level disclosures are extended to firms above £5 billion
What’s not covered yet
The rules don’t yet apply to portfolio management, which the FCA plans to consult on in early 2024. Overseas funds sold in the UK also sit outside the regime for now, and whether and how to extend it to them is a decision for HM Treasury.
What to do now
- Review every fund name, listing the products that use sustainability-related terms and testing them against the naming rules and the 70% guidance.
- Decide on labels by working out which products could qualify and what evidence you’d need to support that.
- Check your claims before May, since fund factsheets, websites and marketing all fall under the anti-greenwashing rule from 31 May 2024.
SDR is a disclosure regime, but in practice it asks for consistency, because a fund’s name, its label, its consumer-facing disclosure, its factsheet and its website all need to tell the same story and be backed by the same numbers. Starting with the data first makes the documents much easier to get right.
At Kurtosys we see SDR landing on the same governed fund data that feeds factsheets, regulatory documents, client reports and fund websites. When labels, metrics and disclosures come from one source, a change in a product’s approach is reflected everywhere at once, with an audit trail behind it. If you’re working through what SDR means for your range, get in touch.
Sources: FCA PS23/16: Sustainability Disclosure Requirements (SDR) and investment labels, PS23/16 (PDF), FCA GC23/3: Guidance on the anti-greenwashing rule, as at 1 December 2023.
About this article
This article reflects the position at 1 December 2023 and was checked against the primary sources available at that time. Thomas Bjerkén, our regulatory reporting and fund data specialist, joined Kurtosys after it was published and now looks after our regulatory content. The UK SDR regime has moved on since. For the latest position, see SDR naming and marketing rules: one month to the 2 April cut-off.
