Regulatory Update: UK Sustainability Disclosure Requirements

Mini podcast December 13, 2023


The UK FCA has just finalized its Sustainable Disclosure Requirements, or SDR, aimed at supporting end investors to navigate the investment product landscape and ultimately reduce greenwashing and enhance consumer trust.

The proposal includes a general anti-greenwashing rule for all FCA-authorized companies, and specific rules for labeling, marketing and naming sustainable funds.

In a big departure from the EU’s SFDR, it introduces four brand-new labels, all of which will have to have a sustainability objective.

  1. The first label –Sustainability Focus– can be used by funds that can demonstrate an absolute standard of sustainability.
  2. The second –Sustainability Impact– can be used by funds able to demonstrate a measurable impact on social or environmental outcomes.
  3. The third –Sustainability Improvers– relates to those funds that invest in transitioning assets and funds using this label must invest in assets that have the potential to improve environmental or social sustainability over time.
  4. Finally, a fourth label –Sustainability Mix Goals– will allow fund managers to use some combination of the other three labels.

All four of these labels will require that at least 70% of the assets within the fund are aligned to the label. Those assets must be selected with reference to a robust, evidence based standard that is an absolute measure of environmental or social sustainability. Other assets must not conflict with the sustainability objective.

To use these labels, investors will have to prepare to ensure that their methodology and KPIs are robust – i.e. that they stand up to scrutiny – and evidence based – i.e. derived from an objective and relevant body of data or other evidence. These will be documented in attendant disclosure requirements including specific consumer-facing communications.

The SDR will start coming into force in May 2024, for the anti-greenwashing rule, and firms can start using the labels from July.

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