Sustainability Disclosure Requirements (SDR) and investment labels Consultation Paper
October 2022
Sustainability Disclosure Requirements (SDR) and investment labels
Consultation Paper
CP22/20*** October 2022
Authority
Sustainability Disclosure Requirements (SDR) and investment labels
implementation of disclosure requirements aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The proposals in this CP are a starting point for a regime that we will expand and evolve over time. These proposals capture the core elements of the regime: sustainable investment labels; qualifying criteria that firms must meet to use a label; product- and entity-level disclosures; and naming and marketing rules.
The labels distinguish between different types of investment product based on their sustainability-related objectives and features. Together with the associated disclosures, they will give consumers the information they need to make informed choices about which products meet their needs and preferences. The package of measures that we are proposing aims to provide greater transparency, consistency, and in turn, trust, in the market for sustainable investment products.
The proposals in this CP focus on funds and portfolio management based in the UK, as set out in more detail in Chapter 3, Table 1. However, as we want retail investors to be able to trust all products offered in our market, overseas funds form an important part of the overall regime. We intend to follow with a separate consultation in due course on how the proposals in this CP may be applied in respect of overseas funds.
We also recognise that there is potential for similar consumer harm in relation to other investment products marketed to retail investors in the UK, such as pension products. We have included a short discussion on issues relating to these products in Chapter 8, with a view to expanding the regime in due course, working with other government departments to ensure a consistent and coherent approach.
Further, we recognise that the market for sustainable investment products is still evolving. Our proposals are designed to help consumers navigate the market as it is today, while allowing room for further development in future. Importantly, we intend to build on our proposed requirements in line with the development of international sustainability-related reporting standards by the International Sustainability Standards Board (ISSB).
In developing our proposals, a key aim has been to ensure the regime works both in the interests of consumers and for the firms that need to apply the rules in practice. So, we have engaged with industry throughout the process – including through our discussion paper and by taking advice from a dedicated Disclosures and Labels Advisory
Since the needs of consumers have been central to our policy design, we also carried out consumer research to inform our final proposals. The findings are summarised in Chapter 2 and outlined in full in an Occasional Paper published alongside this CP (Occasional Paper 62).
We sought to build on existing requirements and expectations for firms – outlined in our Guiding Principles for the design, delivery and disclosure of Environmental, Social and Governance (ESG) funds, published in July 2021 – emphasising that firms making sustainability-related claims must be able to evidence them. We have developed a set of qualifying criteria that will ensure firms are indeed able to substantiate the claims they are making. We are also proposing naming and marketing rules that restrict the use of certain sustainability-related terms for products that do not use a label.
Group (DLAG).
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While we need to move quickly to address potential harms in the market today, we recognise that firms will need time to apply the new rules: to assess their products against the qualifying criteria, and decide whether to label their products or amend their naming and marketing accordingly. They will also need to adjust to the new disclosure requirements.
So, we propose that the labelling, naming and marketing and initial disclosure requirements under this regime would not come into effect until at least 30 June 2024. This is one year after we intend to publish our final rules, subject to consultation feedback.
We are also proposing a general ‘anti-greenwashing’ rule reiterating requirements for all regulated firms that sustainability-related claims must be clear, fair and not misleading. Since this aims to clarify existing rules, this would come into effect immediately on publishing our Policy Statement (PS).
We want the UK to be a trusted centre for sustainable investment and place the UK at the forefront of sustainable investment internationally. Our proposals aim to do this by setting robust regulatory standards to protect consumers that raise the bar and build a strong foundation for sustainable investment products. However, as set out in DP 21/4, we recognise that many firms and products that may be in scope of our proposals operate internationally. We have sought, as far as possible, to achieve international coherence with other regimes – notably the Sustainable Finance Disclosure Regulation (SFDR) in the European Union (EU) and proposals by the Securities and Exchange Commission (SEC) in the United States (US).
The starting point for our proposals is, however, different as we are introducing a consumer-focussed labelling regime as well as disclosure requirements. So, although we have sought to complement the approaches taken in other jurisdictions our proposals differ in some areas, as discussed in Chapters 4 and 5, and Annex 1.
What we want to change
Our proposals cover the following main areas:
• Sustainable investment labels to help consumers navigate the investment product landscape and enhance consumer trust.
• Consumer‐facing disclosures to help consumers understand the key sustainability-related features of a product.
• Detailed disclosures targeted at a wider audience (eg institutional investors and consumers seeking more information):
– pre‐contractual disclosures (eg in the fund prospectus), covering the sustainability-related features of investment products
– ongoing sustainability‐related performance information including key sustainability-related performance indicators and metrics, in a sustainability product report
– a sustainability entity report covering how firms are managing sustainability-related risks and opportunities
• Naming and marketing rules restricting the use of certain sustainability-related terms in product names and marketing materials unless the product uses a sustainable investment label.
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• Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers
• A general ‘anti‐greenwashing’ rule applied to all regulated firms which reiterates existing rules to clarify that sustainability-related claims must be clear, fair and not misleading.
Taken together, our proposals aim to reduce greenwashing, address the associated harms and build trust in the market.
The labelling regime assesses products based on the sustainability objective they are seeking to achieve. The three labels – ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’ – distinguish between different types of sustainable product, according to the nature of the objective and the primary channel by which each can plausibly achieve or encourage positive sustainability outcomes.
There is no hierarchy between the proposed labels: each is designed to deliver a different profile of assets and consumer preferences. We propose that firms can choose whether or not to label their products. Firms will however need to meet our proposed qualifying criteria to do so. The criteria will ensure firms are substantiating their sustainability-related claims – including by setting a clear, explicit sustainability-related objective and reporting on the sustainability performance on an ongoing basis. If firms are not able to meet these criteria to evidence their claims, we propose restrictions on the use sustainability-related terms in their product names and marketing. This is key to protecting consumers from greenwashing.
We note that considering the financial implications of ESG factors in investment decisions is increasingly seen as integral to a firm’s meeting its fiduciary duty to clients and consumers. And some consumers’ ESG preferences fall short of influencing positive environmental or social outcomes – for instance, they may seek certain exclusions to align with their individual ethics or values. It is important that consumers are able to identify and access such products.
But equally, it is important that they can distinguish them from products that
do contribute to positive sustainability outcomes and meet our qualifying
criteria. Our naming and marketing rules therefore allow for firms to describe the sustainability-related strategies of such products, but in a manner proportionate to the role that sustainability considerations play in their investment processes.
Further, our proposed product- and entity-level disclosure rules, and requirements for distributors, aim to provide consumers with the information they need to choose between different products and providers. We have sought to build from existing requirements to avoid placing a disproportionate burden on firms.
Outcomes we are seeking
Our proposals are intended to advance the FCA’s strategic objective to make markets function well, by increasing transparency on the sustainability profile of products and firms and reducing the risk of harm arising from greenwashing.
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Our proposals are also intended to advance the FCA’s operational objectives:
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Figure 1 below sets out the proposed requirements, the actions that firms and other stakeholders will need to take, and how these will support our target outcomes.
• The disclosure requirements will facilitate the flow of consistent information along the investment chain, increasing transparency in the market and furthering our objective to promote market integrity.
• Sustainable investment labels, consumer-facing disclosures, and rules for distributors will help to protect consumers by equipping them to navigate the market more effectively and identify products that meet their needs and preferences. The naming and marketing rules will similarly help to protect consumers by reducing the risk of greenwashing.
• The labels and consumer-facing disclosures will help consumers to compare products more effectively, and efficiently, potentially leading to greater competition among similar products (ie where consumers are comparing like-for-like), in line with our objective to promote competition in the interests of consumers.
Figure 1 – Causal chain
Labels
Firms label their products following the FCA’s qualifying criteria
Consumer- facing disclosures
Firms provide easily accessible product-level information to consumers
Detailed product-level disclosures
Firms produce more detailed product-level disclosures
on the sustainability- related features of products
Detailed entity-level disclosures
Firms provide information
on how sustainability- related risks and opportunities are managed
Naming and marketing rules
Firms ensure that their sustainability claims are proportionate and not exaggerated
Rules for distributors
Distributors ensure labels and consumer- facing disclosures are facilitated to consumers
Greenwashing is reduced and consumers are protected from associated harm
Link to consumer protection objective
Increased provision of standardised sustainability information along the investment chain
Link to market integrity objective
Consumers use labels and disclosures to more effectively navigate the market and make informed decisions
Link to competition objective
Mechanism: firms design products that meet regulatory expectations and the needs of consumers
Mechanism: firms rebuild consumer trust
Secondary outcome: increased provision of sustainable investment products
Secondary outcome: increased capital flows into sustainable activities
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Outcome Mechanism Intervention
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Measuring success
To assess the effectiveness of our policy, we will:
• monitor use of the sustainable investment labels by firms eg through a review of the characteristics of labelled products to assess whether they are meeting our criteria and how they are performing against their commitments
• assess the usefulness of the labels and product-level information to consumers eg through our Financial Lives Survey and by engaging with consumer groups such as Which?
• assess the provision of sustainability-related information through the FCA ESG Division’s Market Intelligence and Engagement team’s horizon-scanning activities and working with other regulators such as the Prudential Regulation Authority (PRA) and Financial Reporting Council (FRC)
• assess the incidence of greenwashing by firms through monitoring complaints made to the FCA’s Supervision Hub and intelligence gathered on quality of applications made to Fund Authorisations. As set out in ‘FCA outcomes and metrics’, we are working on metrics to monitor the incidence of misleading marketing for ESG products and the increase in trust of ESG-related products.
• carry out a post-implementation review after three years of the regime coming into force
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Supervising and enforcing the regime
We will apply our usual supervisory and enforcement approaches and respond to compliance issues as they arise. We may also carry out periodic assessments. We may take enforcement action if a firm has ignored a requirement to make the necessary disclosures; made misleading disclosures or misused a label; or breached our naming and marketing rules.
If a firm chooses to label a product, the firm remains responsible for its classification and ensuring the label is appropriate. The Fund Authorisation team will review, and may challenge, the categorisation of any new fund submitted for authorisation. However, this will not be an approval of the label.
We will continue to support industry with the implementation of the regime through our stakeholder engagement (eg roundtables, webinars etc) and guidance (eg implementing guidance in Appendix 2 of this CP).
Who this applies to
This CP will be of interest to all FCA-regulated firms, as we are proposing to introduce a general ‘anti-greenwashing’ rule that will apply to all firms. The core elements of the regime – labelling and classification, disclosure and naming and marketing rules – will apply to asset managers initially.
However, we are seeking views on expanding the regime to FCA-regulated asset owners in respect of their investment products. We are also proposing targeted rules for the distributors of investment products to retail investors in the UK.
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Our proposals have been developed primarily in the interests of retail investors (also referred to in this CP as ‘consumers’) ie non-professional investors, as well as institutional investors (also referred to in this CP as ‘clients’). We refer to clients more broadly in the draft instrument at Appendix 1 to cover both retail and institutional investors. We encourage feedback from these stakeholder groups.
We also welcome contributions from all parts of the financial sector, and other interested parties, including:
• industry groups and trade bodies
• consumer groups and individual consumers
• policymakers and other regulatory bodies
• industry experts and commentators
• academics and think tanks
• stakeholder advocacy groups
Equality and diversity considerations
We have considered the equality and diversity issues that may arise from the proposals in this CP. We do not consider that these proposals adversely impact any of the groups with protected characteristics ie age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation and gender reassignment. We will keep this under review as we finalise the rules.
Next steps
We will review feedback received and intend to set out our final rules in a PS by the end of the first half of 2023. We also intend to build on the proposals in this paper and follow with further consultations in due course – including to expand the scope of the regime to overseas and pension products. See Chapter 8 for an overview of these actions.