Tighter sustainability regime for firms and financial products confirmed by FCA

Following its consultation issued in October 2022, the FCA has finally confirmed in late November a package of measures aimed at improving the trust and transparency of sustainable investment products and minimising greenwashing, that will be implemented in stages starting from May 2024. Our detailed briefing on the FCA's PS23/16 position statement can be found here.

The measures are unashamedly consumer-centric, and the FCA has clearly stated that “the package of measures has consumers at its heart”. This reflects the FCA’s view that, given strong consumer demand for investments with a positive environmental or social impact, with the FCA finding that 80% of consumers want their money “to do good, as well as deliver a return”, trust in the market for sustainable investment products is vital.

What the FCA will do

In short, the FCA will introduce:

• an anti-greenwashing rule for all FCA-authorised firms, to ensure sustainability-related claims made about their products or services are fair, clear and not misleading and consistent with the sustainability profile of the product or service, to come into effect from 31 May 2024^[1]
• four product labels for sustainable investment products, which can only be used for products that qualify on the basis of clear sustainability goals and specified criteria – these can be used from 31 July 2024
• naming and marketing requirements for investment products, prohibiting the use of certain sustainability-related terms (such as “ESG” or “environmental”), unless certain conditions are met, with effect from 2 December 2024
• ongoing product-level and entity-level disclosures for firms with AUM over £50bn from 2 December 2025
• entity-level disclosure rules extended to firms with AUM over £5bn from 2 December 2026

The proposals support the Government’s ambition for a Sustainability Disclosure Requirements (“SDR”) regime and labelling regime, as set out in its 2023 Green Finance Strategy and 2021 Roadmap to Sustainable Investing. They also come as the FCA has said it intends to consult in 2024 on updating their Taskforce on Climate-related Financial Disclosures (“TCFD”) aligned disclosure rules for listed companies, to reference the ISSB’s standards.

Learning from the EU

In terms of investment labelling, the FCA has presumably been watching – and learning from - the issues that have plagued the EU’s Sustainable Finance Disclosure Regulation (“SFDR”). The SFDR has effectively been used by industry participants and end-users as a labelling regime for investment products rather than as a reporting regime as intended, resulting in a number of funds being re-categorised due to concerns about how the Regulation operates. The European Commission itself has acknowledged the SFDR’s shortcomings in terms of certainty, usability, and as a mitigant to greenwashing, and is currently reviewing the regime. 

More in store

The FCA intends to expand and evolve the regime into the following areas: portfolio management; pension and other investment products; financial advisors; and disclosures. Of particular concern to asset managers (many of whom are global in nature) is how the FCA would approach overseas funds. It is clear that the FCA would want a level playing field. While extending the regime to overseas funds is beyond the FCA’s remit, it is actively engaging with HM Treasury to consider the options.

What you can do

The FCA recommends that:

• all authorised firms should prepare for the new anti-greenwashing rule if they make claims about the sustainability characteristics of their products or services, to ensure sustainability claims are fair, clear and not misleading
• UK asset managers should decide whether to label products that aim to achieve positive sustainability outcomes, if they meet the qualifying criteria. Managers should familiarise themselves with the new requirements and prepare to meet them in the implementation timeframes
• all distributors should prepare to make the labels and consumer-facing disclosures available to retail investors, and to keep them up to date following changes made by the firm 

The FCA’s consultation on the supporting guidance for the anti-greenwashing rule is open until 26 January 2024.

^[1] The FCA is consulting on supporting guidance