New Labels Showcase the Various Shades of Green Investments

The UK Sustainability Disclosure Requirements A New Era in Transparent Sustainable Investing

In a significant move to enhance transparency and trust in the sustainable investment market, the UK’s Financial Conduct Authority (FCA) has introduced the UK Sustainability Disclosure Requirements (UK SDR). This new regulatory framework is designed to provide clarity, consistency, and credibility to sustainability claims made by investment products, ensuring that investors can make informed decisions.

The Key Elements of UK SDR

The UK SDR, outlined in the FCA’s final Policy Statement (PS23/16) released in November 2023, introduces several critical components aimed at preventing greenwashing and enhancing transparency.

Sustainability Labels

One of the cornerstone elements of the UK SDR is the introduction of four distinct sustainability labels. These labels allow funds that meet specific criteria to be categorised based on their sustainability profile. Funds can now be classified into three broad categories:

– Sustainability-labelled funds: These funds meet the requirements and use one of the four new sustainability labels.
– Non-labelled ESG funds: These funds use ESG terms in their names or marketing but do not adopt sustainability labels.
– Non-ESG funds: These funds do not adopt sustainability labels and are not marketed as ESG funds.

The inclusion of a Sustainability Mixed Goals label is particularly noteworthy, as it accommodates funds with blended sustainability strategies that did not fit neatly into the original three labels.

Product- and Entity-Level Disclosures

The UK SDR mandates detailed disclosures at both the product and entity levels. This includes consumer-facing information, pre-contractual disclosures, and ongoing product-level disclosures.

Asset managers must provide clear information about the sustainability objectives, strategies, methodologies, indicators, and outcomes of their funds. For larger asset managers handling assets over £5 billion, additional entity-level disclosures are required, including details on any material negative environmental or social impacts that may arise from pursuing sustainability objectives.

Anti-Greenwashing Rules

A robust anti-greenwashing rule is at the heart of the UK SDR. This rule demands that any sustainability claims made by financial products must be fair, clear, and not misleading. Claims must be substantiated by reliable and up-to-date information to ensure that investors are not misled by exaggerated or false sustainability assertions.

This rule is set to take effect from 31 May 2024, providing a crucial safeguard against misleading marketing practices.

Naming and Marketing Rules

The UK SDR also introduces strict naming and marketing rules to restrict the use of certain sustainability-related terms.

Terms such as sustainable, sustainability, or impact can only be used in product names and marketing materials if the product meets the qualifying criteria for a sustainability label. This ensures that only products that genuinely meet sustainability standards can use these terms, thereby protecting consumers from misleading claims.

Implementation and Impact

The implementation of the UK SDR is staggered, with different components coming into force at various stages.

The anti-greenwashing rule will be effective from 31 May 2024, while the remaining components will come into force from 31 July 2024.

This phased approach allows firms to adjust to the new requirements gradually. The FCA has also provided temporary flexibility for firms to comply with the naming and marketing rules until 2 April 2025, provided they meet specific conditions such as submitting completed applications for amended disclosures by 1 October 2024.

Broader Implications and Future Directions

The UK SDR is part of a broader global trend towards greater transparency and accountability in sustainable investing.

The EU’s Sustainable Finance Disclosure Regulation (SFDR) serves as a comparable framework, and the FCA has addressed operational considerations to ensure interoperability and compatibility with other disclosure regimes.

The UK SDR also paves the way for potential future expansions, such as extending the regime to portfolio management and wealth management services for individuals and retail investors.

A consultation paper published in April 2024 and further details expected in Q2 2025 indicate the FCA’s commitment to continuously enhancing the sustainability disclosure framework.

Conclusion

The UK Sustainability Disclosure Requirements mark a significant step forward in ensuring the integrity and transparency of sustainable investment products. By introducing clear labels, stringent disclosure requirements, and robust anti-greenwashing rules, the FCA is creating an environment where investors can trust the sustainability claims made by financial products.

At Cutts & Co Accountancy, we believe that these regulations will not only enhance consumer trust but also foster a more responsible and sustainable financial sector.

As the UK continues to evolve as a global financial centre, the UK SDR will play a crucial role in maintaining its reputation for integrity and transparency.