In late November, the FCA confirmed a substantial package – within Policy Statement 23/16 – of measures to improve the trust and transparency of sustainable investment products and minimise greenwashing.
The FCA plans to introduce:
1) An anti-greenwashing rule – applicable to all FCA regulated firms;
2) Product labels – applicable to UK funds only; and
3) Naming and marketing requirements – applicable to UK funds only.
Anti-greenwashing rule
The anti-greenwashing rule, which is expected to take effect at the end of May 2024, will require all FCA-authorised firms to make sure that sustainability related claims made about financial products or services are clear, fair, and not misleading and are consistent with the sustainability profile of the product or service. The FCA will publish formal guidance, which is currently under consultation, to assist firms in complying with the new rule.
The FCA’s formal guidance will make clear that ESG claims – irrespective of the media through they are communicated – are factually correct and capable of being substantiated, are presented in a way that is capable of being understood, are complete (they should not omit or hide important information) and are fair and meaningful. None of these requirements are new, conceptually, given the existing “clear, fair and not misleading” standard, but clarificatory as regards ESG claims.
The guidance provides numerous illustrative examples of what would be considered poor practice by including, for example, in promotional material for a fund, an investment manager prominently displaying a claim that all investments are reviewed for their sustainability characteristics, even though these sustainability characteristics are not actually a significant factor in the investment manager’s decisions and not all investments are systematically reviewed in the investment process. Real scenarios that that we have already discussed with clients with the anti-greenwashing rule in mind include:
– Unclear claims as to signatory status to various ESG related standards; and
– Claiming funds are ESG measured with no discernible benchmark against which objective measurement can be evidenced.
Product Labels
Other than the anti-greenwashing rule (which has an impact on all FCA-regulated firms) the remainder of the FCA’s ESG regime applies only to UK authorised or unauthorised funds, at this stage, though the FCA intends to work with the Treasury on options for extending the regime to overseas funds. Furthermore, the FCA intends to consult on proposals relating to its ESG approach for portfolio managers, having received industry feedback that its proposed approach was unsuitable. The FCA states this will be forthcoming in “early 2024”. So, watch this space…
The headlines of the product labelling regime include:
1. Unlike the European SFDR (which has somewhat morphed into a labelling regime despite being designed as a disclosure regime), the UK regime explicitly is a labelling regime;
2. There will be four product labels which may be used by product providers if their UK funds meet specified criteria:
a) Sustainability focus – invests mainly in assets that focus on sustainability for people or the planet.
b) Sustainability improvers – invests mainly in assets that may not be sustainable now, with an aim to improve their sustainability.
c) Sustainability impact – invests mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet.
d) Sustainability mixed goals – invests mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet.
3) The FCA confirms that a sustainability label is not warranted for funds (which are marketed to retail clients) which integrate ESG considerations, but which do not meet the specified criteria for the specified labels, though note the Naming and marketing section below;
4) The regime will operate in tandem with new disclosure requirements, whereby asset managers will be required to make a series of sustainability related disclosures, including at the pre-contractual stage and on an ongoing basis about their products and, where they manage assets worth >£5bn, at the entity level also.
Naming and marketing
The naming and marketing rules apply to UK products which are marketed to retail clients which do not use a label, and require that sustainability-related terms can only be used in such product names and marketing if:
1) The product has sustainability characteristics and the product’s name accurately reflects those characteristics*;
2) Firms produce the same types of disclosures as required for a labelled product;
3) Firms produce and prominently publish a statement to clarify that the product does not have a label and why;**
4) In the case of a feeder, the product includes in its name terms which are consistent with those used by the relevant master fund and clients are provided with easy access to the disclosures and relevant statement referred to above.
Potential Changes to the EU’s Sustainable Finance Disclosure Regulations (“SFDR”)
Setting aside the upcoming amendments to the draft RTS (which are currently going through the legislative process) and due to be published in Q1 2024, we can infer what the future direction of SFDR might look like in the long term by reviewing the detailed questionnaire addressed to the public last year by the European Commission. With concerns that the SFDR has become a “de facto labelling regime”, two potential approaches are suggested within the questionnaire. One approach could see Europe scrap the Article 8 and Article 9 products and replace them with 4 new opt in labels which almost map perfectly onto the proposed UK regime outlined above. This is by no means an accident and is a very deliberate approach by Europe – one we believe we are likely to see across future regulatory evolution in the UK and the EU.
The other approach which may take effect in Europe would be the retention of the Article 8 and Article 9 products, but change them in to opt in formal labels with minimum eligibility criteria.
*But the terms ‘sustainable’, ‘sustainability’, ‘impact’ and variations thereof must not be used
**On the relevant digital medium for the product and/or in the product-level disclosure
We believe the likely outcome in Europe is the adoption of express product categories, which will be similar to the UK SDR regime (though in practice they will be distinct regimes). So, whilst the majority of the SDR may not currently apply to your business, this may change if the EU were to follow the UK’s approach.
With all of that said firms should look to add the following tasks to their to do list:
– Review offering documentation, marketing material, website, slide decks and social media for compliance with the anti-greenwashing rule that will be effective from May;
– Track the changes to the EU’s SFDR regime – and its possible convergence with the UK regime – for EU funds and those other funds marketed across the EU determine if your fund(s) can use one of the four labels and how you would justify the use of that label(s);
– Determine, if applicable, how you will evidence compliance with the new rules regarding the use of sustainability related terms in fund names.
