On 28th November 2023, the FCA published its long-awaited Policy Statement on Sustainability Disclosure Requirements (SDR) and Investment Labels (PS23/16). This regulation is centred on the FCA’s regulatory objective of consumer protection, and forms part of a wider set of regulations such as Consumer Duty.
Until now, firms have mainly been subject to European regulations implemented by the UK, such as the Sustainable Finance Disclosure Regulation (SFDR), the Markets in Financial Instruments Directive (MiFID) and the Undertakings for Collective Investment in Transferable Securities (UCITS). Whilst the FCA played an active role in shaping EU guidelines, they encompass multiple member states’ market conditions and national priorities. In a post-Brexit era, the FCA’s regulatory objectives become more prominent, with the SDR being an example of that.
OThe SDR represents a package of measures designed to improve the consumer investment journey by refining the way products are labelled and marketed so that investors can better match their sustainability priorities with investment choices.
It applies to all UK FCA-regulated financial firms and their UK-domiciled products marketed in the UK. Rather than replace current European regulations, the FCA has designed the SDR to be compatible with existing reporting requirements.
TThe FCA has proposed a new labelling regime consisting of four investment labels that will accompany products with sustainability characteristics. The four labels were designed to indicate a particular sustainability objective and strategy, rather than a sustainability ‘grade’ within a hierarchy.
The ‘Sustainability Focus’ label is comparable to the EU's SFDR’s Article 9 category which includes products with a sustainable investment objective.
The ‘Sustainability Improvers’ label is intended for products that don’t currently deliver sustainability outcomes but have the potential and intention to over time.
The ‘Sustainability Impact’ label applies to products that have pre-defined sustainability targets and have implemented a robust method for measuring and demonstrating outcomes.
Finally, the ‘Sustainability Mixed Goals’ label captures products that invest in a mix of sustainable and improving assets.
As of 31st July 2024, firms can use labels with accompanying disclosures and statements. All labelled products will be accompanied by a new document – the consumer-facing disclosure.
In the first phase of the SDR, we expect firms will prioritise labelling strategies that align with SFDR’s Article 9. This is likely to result in a greater adoption of the 'Sustainability Focus' label compared to other labels. However, it’s important to note that all labels are still necessary, and we expect their usage to evolve as companies address initial compliance requirements.
OThe SDR’s anti-greenwashing rule looks to ensure that any sustainability-related claim must be “clear, fair and not misleading”. This covers words and images. According to the FCA, examples may include featuring ESG ratings without context and misusing images of rainforests. The rule is effective for all firms under its scope as of 31st May 2024.
Similarly, the naming and marketing rules look to ensure that sustainability-related terms like ‘ESG’, ‘green’, and ‘impact’ are used appropriately. Use of these terms will be restricted to products that meet certain requirements. Firms will also be required to produce consumer-facing disclosures for both labelled and unlabelled products detailing their sustainability features.
The measure on disclosures requires firms to issue standalone disclosures for all labelled and unlabelled products. Between 31st July 2024 and 2nd December 2024, firms will publish consumer-facing and detailed product-level disclosures.
Consumer-facing disclosures present a summary of a labelled products’ sustainability characteristics. Unlabelled products must explicitly state that they are not labelled.
Detailed product-level disclosures, including pre-contractual and ongoing disclosures, offer more information on a given product, including its sustainability objective, investment policy and strategy, sustainability metrics, and so on. These are product changes and would result in investor notices.
As of 2nd December 2025, firms with over £50 billion assets under management will produce an annual sustainability entity report as part of the entity level disclosures requirement. This measure will apply to firms with over £5 billion assets under management as of 2nd December 2026 onwards.
The FCA highlights the role of distributors, namely financial advisors and platforms, in guiding consumers throughout their investment journey as the measures begin to take effect.
As of 31st July 2024, distributors will be responsible for ensuring easy access to sustainability-related information for investors through the appropriate channels.
We see two key areas for distributors:
However, this is not a 'big bang' approach. As product manufacturers implement the measures on disclosures between 31st July 2024 and 2nd December 2024, distributors will need to be responsive and adapt as products undergo changes throughout the year. Phased implementation by manufacturers may assist distributors by allowing more time for testing.
The obligation to be “clear, fair and not misleading” has been around for some time, and firms are used to disclosing the ‘ingredients’ in their products. But not every consumer will understand every ingredient and, in particular, they may find it hard to compare the different ‘recipes’ that firms use. The SDR addresses this through identifying building blocks for a simpler labelling regime. Ultimately, the SDR is about improving the consumer investment journey by refining the way firms market their products, more than it is about the investment process itself.
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