PIMFA
Fca consults on Sustainability Disclosure Requirements & investment labels
In November 2021 the Financial Conduct Authority (FCA) published “DP21/4: Sustainability Disclosure Requirements and investment labels” seeking initial views on new sustainability disclosure requirements for asset managers and FCA-regulated asset owners, as well as a new classification and labelling system for sustainable investment products. The regulator welcomed the growing market and innovation in ESG products. However, it also acknowledged that there is a risk of harm if the market responds to rising demand without adequate regulatory checks and balances and delivers poor outcomes to consumers. Without common standards, clear terminology and accessible product classification and labelling, there is also a risk that consumers find it difficult to navigate the landscape of products and assess product suitability. We want consumers to have enough information to assess which products meet their needs and hold firms to account for their sustainability claims.
Maja Erceg
Senior Policy Adviser – EU and Government Affairs
Building from the early views set out in the “Discussion Paper on Sustainability Disclosure Requirements (SDR) and investment labels (DP21/4)”, on 25 October 2022, the FCA published “Consultation Paper (CP22/20)” on Sustainability Disclosure Requirements (SDR) and investment labels. The regulator proposes new rules to help consumers navigate an increasingly complex investment product landscape, protect them from greenwashing, and rebuild trust. The proposals in this CP are a starting point for a regime that we will expand and evolve over time. They cover the following main areas:
- Sustainable investment labels to help consumers navigate the investment product landscape and enhance consumer trust.
- Consumer facing disclosures to help consumers understand the key sustainability-related features of a product.
- Detailed disclosures targeted at a wider audience (eg institutional investors and consumers seeking more information).
- Pre contractual disclosures (e.g. in the fund prospectus), covering the sustainability-related features of investment products.
- Ongoing sustainability related performance information including key sustainability-related performance indicators and metrics, in a sustainability product report;
- A sustainability entity report covering how firms are managing sustainability-related risks and opportunities;
- Naming and marketing rules restricting the use of certain sustainability-related terms in product names and marketing materials unless the product uses a sustainable investment label.
- Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers
- A general ‘anti greenwashing’ rule applied to all regulated firms which reiterates existing rules to clarify that sustainability-related claims must be clear, fair and not misleading.
The labeling regime assesses products based on the sustainability objective they are seeking to achieve. The three labels – ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’ – distinguish between different types of sustainable product, according to the nature of the objective and the primary channel by which each can achieve or encourage positive sustainability outcomes.
The FCA proposes that financial advisers will be in scope of the new rules as they relate to their roles as distributors of information to retail investors. The FCA is exploring how best to introduce further requirements for financial advisers focusing on product suitability and will consult on these in due course.
While the regulator wants to move quickly to address potential harms in the market today, it recognises that firms will need time to apply the new rules: to assess their products against the qualifying criteria and decide whether to label their products or amend their naming and marketing accordingly. They will also need to adjust to the new disclosure requirements. The FCA will publish the final rules and guidance in a Policy Statement in Q3 2023.
