Following the release of draft proposals and ensuing consultation which ended in January 2023, the Financial Conduct Authority (FCA) has released its final Sustainability Disclosure Requirements (SDR) which will come into force from May 2024. The purpose of SDR is to prevent greenwashing and improve trust and consumer protection by establishing an anti-greenwashing rule, a product labelling scheme, naming and marketing rules and disclosure requirements for sustainability-related products in the financial markets.
The anti-greenwashing rule has been put up for consultation, ending on the 26th of January 2024. The rule is due to be implemented on the 31st of May 2024.
Under the anti-greenwashing rule, sustainability references must be: correct and capable of being substantiated; clear and presented in an understandable way; complete, by considering the full life-cycle of the product or service and by not omitting or hiding important information; and fair and meaningful in comparison to other products or services.
Since the consultation ending in January 2023, the FCA has decided on four sustainability product labels, namely ‘Sustainability focus’, ‘Sustainability improvers’, ‘Sustainability impact’, and ‘Sustainability mixed goals’. These labels can be implemented from the 31st of July 2024. The latter is meant for fund of fund products so this blog will focus on the first three. The requirements for these are as follows:
· Aims to invest in environmentally and socially sustainable assets, determined using a robust, evidence-based standard that is an absolute measure of sustainability.
· Minimum of 70% of the assets must meet the standard and the remaining assets mustn’t conflict with the objective.
· Independent assessment must be undertaken to confirm the assets are fit for purpose. This may be an internal or third-party process.
· Must have and carry out an escalation plan where assets are not demonstrating sustainability against the standard.
If products don’t use any of the labels as above, sustainability-related terms can be used if the following criteria are met:
Disclosures are separated into three categories: consumer, product-level and entity-level disclosures.
Consumer disclosures require a clear, concise website section including:
This disclosure must be reviewed annually and updated to reflect progress towards sustainability objectives for labelled products.
Product-level disclosures include pre-contractual disclosures, ongoing disclosures and on-demand information that certain firms must provide on request to eligible clients.
For products with a label, the information must be broadly associated with qualifying criteria for the label. Firms must produce ongoing disclosures for labelled products 12 months after the label is first used. For public disclosures, the first date they will be eligible is the 31st of July 2025. On-demand client disclosures must be provided after the 2nd of December 2025. For products not using a label but using a sustainability-related term, however, disclosures must include information relating to the investment policy and strategy as well as relevant metrics. For these products ongoing product level disclosures must be provided annually from 12 months after the term is used.
Entity-level disclosures take the form of TCFD and ISSB’s four pillars: governance, strategy, risk management and metrics and targets. Where firms use labels or sustainability-related terms in names or marketing, they must also include details on resources, governance and organisational arrangements for these products. All firms with over £5bn AUM must make these disclosures annually in their sustainability entity report by the 2nd of December 2026. For firms above £50bn, the deadline is the 2nd of December 2025.
SDR may seem like another regulatory spanner in the works, distracting you from your efforts to focus on ESG improvement. KEY ESG’s compliance experts and software solution can guide you through the necessary regulatory requirements so that you can continue to focus on driving better ESG outcomes. For more detail on how KEY ESG can streamline your ESG processes from data collection to reporting, contact a member of our team or request a demo.