The proposals cover the following areas:
1. Sustainable investment labels. The aim of these is to help consumers navigate the investment product landscape and enhance consumer trust. There will be three categories, each underpinned by objective criteria, that distinguish between the different types of sustainable product according to the primary channel by which each can contribute to positive sustainability outcomes.
The labelling regime distinguishes between products according to whether they aim to invest:
- in assets that are environmentally and/or socially sustainable ("sustainable focus");
- to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of the firm ("sustainable improvers"); or
- in solutions to environmental or social problems, to achieve positive, real-world impact ("sustainable impact").
2. Consumer facing disclosures. These are to help consumers understand the key sustainability-related features of an investment product, and must be set out in a standalone document. This includes its sustainability objective, investment approach and (over time) performance against the objective. It also includes disclosing investments that a consumer may not expect to be held in the product given its sustainability objectives. These disclosures must be produced for products with or without a sustainable investment label, although disclosures will inherently be more limited for products that do not have a label.
3. Detailed disclosures. These are more granular than the consumer-facing disclosures and are targeted at a wider audience (institutional investors and consumers seeking more information) and concern:
- pre contractual disclosures (for example, 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; and
- a sustainability entity report covering how firms are managing sustainability-related risks and opportunities.
4. Naming and marketing rules. These will restrict the use of certain sustainability-related terms in product names and marketing materials provided to retail investors unless the product uses a sustainable investment label. For example, terms such as ’ESG‘, ’green‘ or ’sustainable’.
5. Requirements for distributors (such as investment platforms). These are to ensure that product-level information (including labels) is made available and is clear to consumers.
6. A general anti-greenwashing rule. A general rule will apply to all FCA regulated firms that reiterates existing rules that sustainability-related claims must be clear, fair and not misleading and are consistent with the sustainability profile of the product or service (i.e. proportionate and not exaggerated).
Timing
The deadline for response to the Consultation Paper is 25 January 2023.
Subject to feedback on the Consultation Paper, its proposed rules will be final and in force provisionally by 30 June 2023. The rules will then come into effect in tiers, with provisional timings below:
- The general anti-greenwashing rule will come in effect on 30 June 2023.
- The sustainable investment label regime, the consumer-facing disclosures, naming and marketing rules and requirements for distributors will come into effect on 30 June 2024.
- Rules relating to the ongoing sustainability related performance information report will come into effect on 30 June 2025.
- Rules relating to the sustainability entity report will come into effect on 30 June 2025 for firms with assets under management (“AUM”) of £50 billion or more and 30 June 2026 for firms with AUM of greater than £5 billon but less than £50 billion.
The labelling regime
Scope: The labelling regime applies to the following FCA regulated firms:
- Firms carrying out portfolio management;
- UK Undertakings for Collective Investment in Transferable Securities (“UCITS”) management companies;
- Investment companies with variable capital (“ICVC”) that is a UCITS scheme without a separate management company;
- Full-scope UK Alternative Investment Fund Manager (“AIFMs”); and
- Small authorised UK AIFMs.
These are collectively referred to in the Consultation Paper as "in-scope firms”.
The labelling regime applies to the following investment products:
- UK authorised funds (excluding feeder funds and funds in the process of winding up or termination);
- UK unauthorised Alternative Investment Funds (“AIFs”), including investment trusts; and
- Portfolio management services if 90% or more of the value of all constituent products in which they invest qualify for the same label.
These are collectively referred to in the Consultation Paper “in-scope products”.
The “sustainable focus” label
The features of this category of product are:
- Sustainability objective. Alongside its financial risk/return objective, a ‘sustainable focus’ product will have an objective of investing in assets that meet a credible standard of environmental and/or social sustainability, or that align with a specified environmental and/or social sustainability theme.
- Primary channel for sustainability outcomes. This category of product pursues its sustainability goals primarily via the market-led channel of influencing asset prices, and thereby reducing the relative cost of capital of sustainable economic activities/projects.
- Secondary channel for sustainability outcomes. In addition to the primary channel criteria, products in this category will also typically pursue continuous improvements in the sustainability performance of assets through investor stewardship activities.
Further, at least 70% of a ‘sustainable focus’ product’s assets must meet a credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme.
The “sustainable improvers” label
The features of this category of product are:
- Sustainability objective. Alongside its financial risk/return objective, a ‘sustainable improvers’ product will have an objective of delivering measurable improvements in the sustainability profile of its assets over time, including through investor stewardship.
- Primary channel for sustainability outcomes. This category of product pursues its sustainability goals primarily via the channel of investor stewardship. The product’s stewardship approach is directed towards encouraging and accelerating improvements in the environmental or social sustainability profile of its assets, including through participation in system-wide initiatives, with flow-on positive implications for environmental and/or social sustainability.
- Secondary channel for sustainability outcomes. Portfolio construction and asset selection in ‘sustainable improvers’ products is geared towards identifying those assets that are best-placed to improve their sustainability profile over time. So, a secondary channel would be the market-led channel of influencing asset prices and the relative cost of capital of more sustainable economic activities/ projects.
The “sustainable impact” label
The features of this category of product are:
- Sustainability objective. Alongside its financial risk/return objective, a ‘sustainable impact’ product will have an objective of achieving a pre-defined, positive and measurable environmental and/or social impact.
- Primary channel for sustainability outcomes. This category of product pursues its sustainability goals by directing typically new capital to projects and activities that offer solutions to environmental or social problems, often in underserved markets, or to address observed market failures. Products would be expected to have a stated theory of change, and to pursue a highly selective asset selection strategy aligned with that theory of change.
- Secondary channel for sustainability outcomes. Driving continuous improvements in the sustainability performance of assets through investor stewardship activities would be a secondary channel
Further, to qualify for any sustainable investment label, the product must meet:
- five overarching principles covering (1) sustainability objective; (2) investment policy and strategy; (3) Key Performance Indicators (“KPIs”); (4) resources and governance; and (5) investor stewardship (the “Principles”);
- a number of key considerations associated with the Principles, described in the Consultation Paper as “cross-cutting” considerations; and
- certain category-specific key considerations relevant to their particular label.
The FCA is clear that the three categories of labels are intended to be mutually exclusive. Products with a blended strategy could not qualify for more than one label according to the FCA’s criteria, as the firm would be expected to set a clear objective that, together with the other criteria, determines which label is appropriate for the product. The FCA expressly states that there is no hierarchy between the proposed labels: each is designed to deliver a different profile of assets and consumer preferences.
The FCA has created tables setting out the detail of these qualification criteria, as set out in the Annex. Products without a sustainability objective, but which may use strategies such as ‘ESG integration’, would not qualify for a sustainable investment label.
Similarly, products employing strategies such as ‘exclusion/negative screening’ or basic ‘ESG tilts’ are not viewed by the FCA as contributing to positive sustainability outcomes, so would not qualify for a sustainable investment label.
The FCA’s initial view of how these three labels map across to SFDR categorisation is set out in the table below. As can be seen, in some cases funds falling within the Article 8 or Article 9 SFDR categories still cannot meet any sustainable labels.