FCA publishes long-awaited rules and guidance on anti-greenwashing and sustainability

On 28 November 2023 the FCA published its policy statement PS23/16 on Sustainability Disclosure Requirements (SDR) and investment labels, and guidance consultation GC23/3 concerning Guidance on the Anti-Greenwashing rule. (Our earlier article on the SDR consultation CP22/20 can be found here).

Background

The FCA was concerned that consumers find it difficult to identify products that meet their sustainability preferences, due in part to:

• lack of standardised, accessible information; and
• unclear or confusing terms: ‘ESG’ (Environmental, Social and Governance), ‘responsible’, ‘green’ or ‘sustainable’ are open to interpretation and are often used loosely and interchangeably.

Further, the FCA has been concerned that some firms may be making misleading or exaggerated sustainability-related claims about their investment products. The measures proposed aim to inform and protect consumers and improve trust in the market for sustainable investments.

Anti-greenwashing rule

This applies to all FCA-authorised firms who make sustainability-related claims about their products and services, whether that be in client communications or in financial promotions to persons in the UK. The rule also applies to firms when approving financial promotions. The rule and related guidance comes into force on 31 May 2024.

“A firm must ensure that any reference to the sustainability characteristics of a product or service is: (a) consistent with the sustainability characteristics of the product or service; and (b) fair, clear and not misleading.” FCA ESG 4.3.1R(2)

“Sustainability characteristics” include environmental or social characteristics. The FCA is consulting on guidance to assist firms in complying with this rule. Responses must be submitted by 26 January 2024.

In summary, the FCA is proposing guidance that references to sustainability characteristics should be:

• Correct and capable of being substantiated
• Clear and presented in a way that can be understood
• Complete – they should not omit or hide important information and should consider the full lifecycle of the product or service
• Fair and meaningful in relation to any comparisons to other products or services.

Firms will be expected to have evidence to back up their sustainability-related claims. The FCA notes in its consultation that it has worked closely with the Competition and Markets Authority (CMA) and the Advertising Standards Authority to ensure its proposed guidance to the anti-greenwashing rule is consistent with the CMA guidance and the requirements of the ASA’s CAP and BCAP codes.

Investment labels, disclosure, naming and marketing rules

These apply to UK asset managers. Targeted rules apply to distributors of investment products to retail investors in the UK. Portfolio management products and services are currently out of scope, subject to future consultation

The timetable for compliance is as follows:

• 31 July 2024 – firms can begin to use labels, with accompanying disclosures
• 2 December 2024 – naming and marketing rules come into force, with accompanying disclosures
• 2 December 2025 – ongoing product-level and entity-level disclosures for firms with AUM > £50bn
• 2 December 2026 – entity-level disclosure rules extended to firms with AUM > £5bn

The requirements, at a high level, cover the following areas.

Labels

To use a label, products must meet the general and specific criteria relating to that label on an ongoing basis. Firms must also meet certain requirements and make associated disclosures.

Firms can choose to use the labels for products seeking to achieve positive sustainability outcomes, if the products meet the general and specific criteria relating to that label on an ongoing basis. Firms must also meet certain requirements and make associated disclosures. The four labels are: Sustainability Focus; Sustainability Improvers; Sustainability Impact; and Sustainability Mixed Goals. The labels are not designed to be in a hierarchy.

The general criteria for use of a label fall into five key themes: sustainability objective, investment policy and strategy, KPIs, resources and governance, and stewardship.

Naming and marketing rules

These apply to sustainability-related products made available to retail investors that do not use one of the labels.

• The terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms must not be used
• The product must have sustainability characteristics and the product’s name must accurately reflect those characteristics
• The same types of disclosures required as for labelled products
• A statement to be published explaining reasons why the product does not have a label
• Marketing materials must include the same disclosures and statement as those required when sustainability-related terms are used in the name of a product.

Disclosures

Sustainability-related products, whether with or without a label, are subject to disclosure requirements falling into four categories:

• Consumer-facing disclosures
• Pre-contractual disclosures
• Ongoing product-level disclosures
• Entity-level disclosures (asset managers with AUM under £5bn only)

Distributors

Distributors are subject to obligations concerning the communication of labels and provision of consumer-facing disclosures to retail investors. Overseas products must include a notice that they are not subject to the UK sustainable investment labelling and disclosure requirements.

Next steps

Firms offering products and services that are impacted by the new requirement should consider the details of the rules and guidance carefully. At high level the provisions are broadly similar to those consulted on, but there have been a number of detailed changes in the final version. The most obvious of these is the introduction of a fourth product label – sustainability mixed goals. No particular assets are excluded from the labels; however, disclosures must now be made where a positive sustainability outcome could also result in negative environmental and/or social outcomes.

The minimum investment threshold of 70% of the gross value of the product’s assets to be invested in line with the sustainability objective now applies across all labels. Further, labelled products should not include any assets that are in conflict with the sustainability objective.

Hopefully, in line with the FCA’s expressed aim, the overall package of requirements will help underpin the UK’s position as a world-leading competitive centre for asset management and sustainable finance.