The FCA has published a consultation paper (CP 22/20) (the CP) setting out its proposals for new rules aimed at reducing greenwashing, addressing associated harms and building trust in the market for sustainable investment products. The proposals seek to ensure the UK’s place at the forefront of sustainable investment internationally.
The proposed requirements focus primarily on portfolio managers and funds based in the UK. Whilst the FCA notes that they are working to maintain coherence between their proposals and similar requirements or proposals in other markets, including the EU and the US, there are a number of important differences which will involve additional complexity for firms and groups that are subject to several regimes.
The CP builds on the FCA’s initial views set out in its Discussion Paper on Sustainability Disclosure Requirements (SDR) and investment labels (DP21/4), which was published last November. The requirements form part of the FCA’s delivery of the UK Government’s Roadmap to Sustainable Investing and build on the implementation of TCFD disclosure requirements, which the FCA introduced in its Policy Statement on Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (PS21/24) as considered in our separate blog post and briefing.
Whilst these new proposals capture certain core elements around investment labels, product- and entity-level disclosures, and naming and marketing rules, in relation to certain products and activities, the FCA expects the regime to expand and evolve further over time. This will include a consideration of overseas products marketed in the UK, which are not included in the scope of the CP.
The development of detailed rules in this area reflects an increasing focus by the FCA (and other regulators internationally) on greenwashing. The proposed new regime is complex and leaves significant areas for the judgement of firms, which should expect to be scrutinised on their performance, not only by financial regulators (through supervisory and enforcement activity) but also by customers, NGOs, and other bodies. It is critical that the public interest in consumer protection and in promoting sustainability are aligned. Whether these rules strike the right balance of protecting consumers whilst not discouraging firms from developing sustainable investment products and services will need to be judged over time.
Sustainable investment labels
The proposed labeling regime is intended to help consumers navigate a product landscape that is becoming increasingly complex.
Product labels will be based on ‘intentionality’ and focus on the particular sustainability objective the product is seeking to achieve. There is no hierarchy between the labels, as each type of product is designed to deliver a different profile of assets and meet different consumer preferences. The regime distinguishes between three types of products according to their investment aims:
- Sustainable focus: Products with an objective to maintain a high standard of sustainability in the profile of assets by investing to meet a credible standard of environmental or social sustainability or to align with a specified environmental or social sustainability theme. These products invest mainly in assets that are sustainable for people or the planet.
- Sustainable improvers: Products with an objective to deliver measurable improvements in the sustainability profile of assets over time, including in response to the stewardship influence of the firm. These products invest in assets that may not be sustainable now, but with an aim to improve their sustainability for people or the planet over time.
- Sustainable impact: Products with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes. These products are invested in assets that provide solutions to environmental or social problems affecting people or the planet to achieve real-world impact.
This is a simplification of the approach set out in the FCA’s initial Discussion Paper and does not include the previously proposed ‘Responsible’ and ‘Not promoted as sustainable’ categories.
Firms will need to decide if they want to apply a sustainable investment label to their products based on an assessment of whether the products meet the relevant qualifying criteria. Products that are not labelled must meet the new naming and marketing rules described below.
Whilst the labels are primarily aimed at consumers, firms may also decide to label products offered to institutional investors.
Product and entity disclosures
The CP sets out proposals for disclosures by in-scope firms, which the FCA intends to extend to certain FCA-regulated asset owners in due course.
Consumer-facing product-level disclosures will summarise a product’s key sustainability-related features to help consumers understand those features, compare products and hold the provider to account for its sustainability claims.
In-scope firms providing portfolio management services will not be required to produce such consumer-facing disclosures, but will instead be required to provide clients with an index of underlying funds, including labels and hyperlinks to the funds’ consumer-facing disclosures.
Separate detailed disclosures at product and entity level will be aimed at a wider audience, including institutional investors, and provide more granular information. These disclosures will involve:
- pre‑contractual disclosures focusing on the product’s sustainability-related features
- a sustainability product report detailing ongoing sustainability‑related performance information, including performance indicators and metrics
- a sustainability entity report setting out how the firm is managing sustainability-related risks and opportunities at an entity-level
The FCA notes that the proposed rules are a starting point for sustainability-related disclosures and recognises that firms may be less familiar with wider sustainability-related disclosures than climate-disclosures, with metrics also being less developed. The FCA intends to build on the proposed requirements as the International Sustainability Standards Board develops further standards on additional sustainability topics.
Naming and marketing rules
Proposed new naming and marketing rules will apply to in-scope firms marketing products that do not use a label and are aimed at reducing the risk of firms continuing to name or market products that do not qualify for a label in a way that may indicate that they are sustainable.
The FCA is proposing to prohibit firms providing in-scope products to retail investors that do not qualify for a label from using sustainability-related terms, including ‘ESG’ (or ‘environmental’, ‘social’ or ‘governance’), ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, ‘responsible’, ‘green’, ‘SDG’ (sustainable development goals), ‘Paris-aligned’ or ‘net zero’ in product names and marketing.
Restrictions will also apply to the use by ‘Sustainable Focus’ or ‘Sustainable Improvers’ products preventing use of the term ‘impact’ in the names and marketing of these products.
In addition, a general ‘anti‑greenwashing’ rule applicable to all regulated firms will clarify that sustainability-related claims must be clear, fair and not misleading, and consistent with the sustainability profile of the product or service (i.e. proportionate and not exaggerated).
Requirements for distributors
To ensure product-level information is made available to consumers, the FCA is also proposing that distributors (i.e. those who offer, sell, recommend, advise on, arrange, deal, propose or provide a product or service) must ensure that sustainable investment labels and consumer-facing disclosures are made available to retail investors in the UK.
When will the new rules come into force?
Since the ‘anti-greenwashing’ rule aims to clarify existing requirements, the FCA intends that this will come into effect immediately on publication of the FCA’s Policy Statement, which is provisionally intended for 30 June 2023.
The rules for labeling, consumer-facing disclosures, pre-contractual disclosures and naming and marketing are expected to come into force the following year from 30 June 2024, whilst the sustainability product report will need to be published by 30 June 2025.
In addition, the FCA intends to phase‑in the entity‑level disclosure requirements, initially requiring disclosures by the largest firms (with more than £50 billion in AUM) from 30 June 2025, with smaller firms (with more than £5 billion in AUM) following one year later.