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The FCA has been hard at work recently, launching a wave of consultations and regulations focused on the UK sustainable investment industry. In this article we’ll cover two of the most recent developments; the FCA’s anti-greenwashing rule, and the proposed extension of the Sustainable Disclosure Requirements (SDR) regime to portfolio managers.

FCA’s anti-greenwashing rule With an implementation date of 31 May 2024, following a consultation that closed in January 2024, the FCA’s new anti-greenwashing rule impacts any FCA-authorised firms that makes sustainability-related claims about their products and services.

The goal is simple; to tackle cases of greenwashing in the industry, and help consumers make informed choices about the sustainable nature of the investments they choose.

Building on existing FCA Handbook rules, the anti-greenwashing rule makes clear that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service, and is fair, clear and not misleading.

There are four main areas of consideration. Sustainability references 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 life cycle of the product or service.
• Comparisons to other products or services are fair and meaningful.

In response to this, a wave of projects were kicked off within firms across the industry, to ensure full compliance with the new guidance, ahead of the 31 May deadline. While for most this will be more of a formality, the FCA raises a number of interesting areas in its final guidance, covering topics such as bias by omission, and the inappropriate use of green imagery on marketing materials.

Extension of SDR to the portfolio management industry

As readers will likely be aware, following a consultation period that first kicked off in October 2022, the FCA has now nailed down its SDR regime for UK-domiciled funds. This is being implemented over a range of dates, including the four new sustainable fund labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals) coming into force on 31 July 2024.

In late April 2024, the FCA released a Consultation Paper in which it proposed carrying over a broad range of principles from the SDR regime for UK-domiciled funds and making them more broadly applicable to portfolio management services in the UK. Notably, if the FCA sticks with its current plans, then the new investment labelling regime will come into force for the portfolio management industry on 2 December 2024, a date that some industry participants found to be sooner than they were initially expecting.

The proposals include extending the use of the four existing SDR investment labels to portfolio managers, as well as setting a threshold of 70% of the gross value of the assets within a portfolio to be invested in alignment with a label, in order for that portfolio to achieve the label.

The Consultation Paper also addresses one of the key areas of uncertainty for portfolio managers; the treatment of overseas funds in portfolios. As overseas-domiciled funds currently remain out of the labelling regime, one of the key questions from the portfolio management industry had been around the treatment of portfolios that use a combination of both UK- and overseas-domiciled funds. In response to this, the FCA have proposed that the 70% portfolio threshold can include funds without a label, and instead places the emphasis on the robust evidence-based sustainable investment selection process carried out by the portfolio manager.

The FCA have proposed a range of other measures, including that portfolio managers use KPIs to measure progress towards meeting the portfolio’s sustainability objective, alongside creating an escalation plan setting out actions that will be taken if assets are not performing in line with expectations in sustainability terms.

Alongside this, the FCA are proposing new rules around the use of sustainability-related terms in naming and marketing, depending on whether the portfolio in question seeks to use a label. This is combined with new disclosures, including product-level, entity-level, and consumer-facing disclosures, with the latter providing an overview of key sustainability characteristics for both labelled portfolio offerings and those that don’t have a label but do use sustainability-related terms in their names and marketing.

Summary

In closing, we’ve seen a number of regulatory developments from the FCA over recent time periods, including the new anti-greenwashing regulation and the proposed extension of the SDR regime to the portfolio management industry. While the regulations are sensible, proportionate, and many would argue much needed, they will inevitably have a range of impacts on the industry, and associated implementation costs. Nonetheless we continue to welcome the clarity the FCA is providing, as we progress into the new regulatory landscape in relation to sustainable investing.

Proposed SDR Labels for portfolio managers

1. Sustainability Focus

> Portfolios with a sustainability objective consistent with an aim to invest in assets that are environmentally and/or socially sustainable, determined using a robust, evidence-based standard that is an absolute measure of sustainability.

2. Sustainability Improvers

> Portfolios with a sustainability objective consistent with an aim to invest in assets that have the potential to improve environmental and/or social sustainability over time – determined by their potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability.
> Firms will need to identify the period of time over which the portfolio and/or its assets are expected to meet the standard, including short and medium-term targets.
> The Firm’s investor stewardship strategy will support the delivery of the objective and help to accelerate improvements in sustainability over time.

3. Sustainability Impact

> Portfolios with a sustainability objective consistent with an aim to achieve a pre-defined, positive, measurable impact in relation to an environmental and/or social outcome.
> Firms must specify a theory of change setting out how they expect their investment activities and the portfolio’s assets to achieve a positive impact.
> Firms must specify a robust method for measuring and demonstrating the positive impact of both the assets the portfolio invests in and the firms’ investment activities.

4. Sustainability Mixed Goals

> Portfolios with a sustainability objective to invest at least 70% in line with a combination of the sustainability objectives for the other labels.
> Must meet the requirements for each of the labels in which the portfolio invests.

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