SDR policy statement and final rules

November 2023

The FCA has published its policy statement with final rules and guidance for Sustainability Disclosure Requirements (SDR) and investment labels. The package also includes a consultation on guidance on the anti-greenwashing rule and a webpage for consumers. 

Having been delayed twice as the FCA considered an unprecedented quantity of industry feedback, performed consumer testing and undertook supervisory work, several adjustments have been made to deliver a more flexible regime and to address certain criticisms. However, the volume and complexity of the requirements will still have a fundamental impact on UK fund managers and their products, and the resources and time needed for implementation will be significant.

This article sets out immediate actions for firms, unpacks how the final rules differ from the FCA's original proposals and recaps the final implementation timeline and broader developments. 

While wealth managers can wait for more clarity (see more on the FCA's plans below), fund managers should take immediate steps to begin, or continue, implementation. 

Building on our previous guide for firms, fund managers should proceed with the following actions, if not already underway:

1. Inform the SDR implementation programme by reviewing the FCA's guiding principles findings, lessons learned from Consumer Duty implementation, and outputs of SFDR post-implementation reviews.
2. Identify in-scope entities and products, and perform a product classification exercise to understand potential alignment with the four SDR labels.
3. Decide whether to uplift and label products that aim to achieve positive sustainability outcomes and perform a full impact and gap analysis.
4. Identify where products use sustainability-related terms in their name or marketing materials — in particular, where the products will not attain a label and there will be certain restrictions.
5. Review the approach to ESG governance and whether there are appropriate resources, organisational structures, and technologies to support the firm's strategic goals under SDR.
6. Assess the adequacy of the approach to stewardship and whether appropriate technology for monitoring, recording and reporting engagement is in place (see further considerations here).

More broadly, all authorised firms should take advantage of the extra time until the anti-greenwashing rule takes effect on 31 May 2024 — see considerations for firms here. 

Distributors should prepare to make the labels and consumer-facing disclosures available to retail customers, and to add a notice on overseas funds to inform consumers that they are not subject to the regime.

KPMG in the UK has a dedicated Wealth and Asset Management practice with relevant ESG and sustainability expertise and experience that can assist you with implementing the SDR regime and complying with the anti-greenwashing rule — see our contacts below.

Although the final regime largely resembles what was consulted on in terms of structure and requirements, the final rules reflect a more practical framework, via the creation of a fourth label and adjustments to the naming and marketing rules. On balance, these amendments outweigh a small number of areas where the requirements have arguably become more stringent. The most important changes are as follows:

Scope

UK UCITS Man Cos and AIFMs and their UK products remain in scope, but it is notable that wealth managers will not be caught by the rules in this policy statement and can expect a separate consultation early in 2024. Otherwise, there are only minor clarifications regarding the status of overseas funds and certain closed-ended AIFs (out of scope), and feeder funds and listed investment trusts (in-scope, with some clarifications).

`Sustainability' labels (revised from `Sustainable')

The most significant adjustment to the labelling regime is the addition of a fourth label — `Sustainability Mixed Goals' — to complement the three labels that are carried forward from the consultation. This should enable the regime to accommodate products whose features cut across the existing labels. In addition, some of the more detailed general criteria requirements regarding resources and governance have been removed. And on stewardship, the FCA has removed references to specific approaches.

Amongst new requirements, the FCA has now applied the 70% minimum sustainability threshold to all labels (previously applicable only for Focus products). Holdings must not conflict with a fund's sustainability objective, and sustainability objectives for labelled funds must reference `positive' environmental and/or social outcomes. Related to this, firms must now identify and disclose if they find that pursuing positive outcomes could result in negative environmental or social consequences (somewhat analogous to the SFDR `do no significant harm' test). 

Changes to label-specific criteria:

Naming and marketing rules

As a result of feedback received, the FCA has introduced some flexibility regarding the list of 19 sustainability-related terms in ESG 4.3.2R (and any other term that implies sustainability characteristics):

• Where products use a label: As per the consultation paper, products may use the entire list of terms. The exception is that only products using the Impact label may use 'impact' in the product name.
• Where products do not use a label: The terms may be used in fund names where the product has sustainability characteristics that are material (70% of its assets have sustainability characteristics) and the terms are used accurately in line with the guiding principles. However, such funds may not use the terms `sustainable', 'sustainability' or `impact' in their name. In marketing materials, the wider terms can continue to be used if the anti-greenwashing rule is met. In both cases, firms must produce the same types of disclosures as a labelled product. In addition, the disclosures must explain the purpose of a label, note that the product does not use a label, and explain why.

Product-level disclosures

Broadly, the structure of disclosures and their content have been carried forward from the consultation:

• Consumer facing: Although these disclosures must still take the form of a standalone document, they are now only required for labelled products and those using sustainability-related terms (the latter must provide certain `minimum information' only). In addition, the separate disclosure category of `unexpected investments' has been dropped, but certain explanations will still be needed. Any material negative environmental and/or social impacts in pursuing the objective should also be disclosed.
• Pre-contractual and ongoing: There are no substantive changes compared to the consultation, but the FCA clarifies that firms may cross-reference other disclosures such as the Stewardship Code, and that pre-contractual disclosures do not need to be updated annually.

For the 'Sustainability Mixed Goals' label only, disclosures must include the proportion of assets invested in accordance with each of the relevant labels and associated information.

Entity-level disclosures

There are no substantive changes for entity-level disclosures, and the assets under management (AUM) thresholds proposed in the consultation are carried forward to the final rules. Compared to the consultation, the FCA has added guidance that firms should consider disclosing their impact on environment and society having regard to the GRI standard, and notes that firms should consider the ISSB, SASB and GRI standards as a starting point. Consideration of other frameworks such as the TNFD may also be useful.

Rules for distributors

There are only small changes to the draft rules, regarding the appropriate communication channel with investors and the timelines for making the information available.

The anti-greenwashing rule

The rule will be introduced as drafted, but the FCA is consulting on associated guidance until 26 January. As a result, the rule will not take effect until 31 May 2024 (rather than on publication of the policy statement as originally envisaged).

Following go-live of the anti-greenwashing rule at the end of May 2024, the labelling regime takes effect from 31 July 2024 and fund managers may choose when after that date to use a label and align their disclosures accordingly. Consumer facing and pre-contractual disclosures must be published at the same time the label is used and naming and marketing rules must be met.

This is only the beginning of the regime and various consultations will extend and amend it in due course. These include:

Consultation on guidance on the anti-greenwashing rule: This was published alongside the policy statement, and it is expected the guidance will come into force on 31 May 2024 at the same time as the anti-greenwashing rule. The draft guidance states that firms should ensure sustainability-related claims are correct and capable of being substantiated, and are clear, complete, and fair and meaningful in relation to any comparisons with other products and services.

Wealth managers: Should expect a consultation in early 2024 regarding an alternative approach.

Overseas funds: The FCA indicates that it would like an even playing field for overseas funds and that it wants all firms marketing their products in the UK to be subject to the same broad requirements. However, it notes that any extension of the incoming Overseas Funds Regime is a matter for HMT.

Pensions and other investment products: The FCA will publish a summary of feedback to its consultation and will consider an extension of the regime in the medium term.

Advisers: Having previously stated that it would issue a consultation paper, the FCA now plans to establish an independent working group for the advice industry to discuss how SDR and labels can support their role.

SDR disclosures: The requirements will be updated over time, for example to draw on the output of the Transition Plan Taskforce, to reference the UK Green Taxonomy once in use, and to align further with future ISSB standards.