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Jennifer Munnings

This 9fin ESG Educational provides a comprehensive guide to the FCA's proposed Sustainable Disclosure Regulations (SDR) and anti-greenwashing rule. All FCA-regulated firms must familiarise themselves with the SDR as they will be impacted by the new rules expected to come into effect mid 2023.

The UK’s Financial Conduct Authority (FCA) has released a consultation paper outlining the proposed Sustainable Disclosure Regulation (SDR), which is designed to increase transparency and tackle greenwashing as the demand for sustainability-related investments increases.

The proposed regime aims to achieve three main objectives:

Encourage consistent information and increase transparency in the market through disclosure requirements

Protect consumers against greenwashing by providing them with the information needed to navigate the market

Promote market competition through sustainability labels and consumer-facing disclosures that allow consumers to effectively compare products


All FCA-regulated firms are subject to the anti-greenwashing rule and the key elements of the regime will initially apply to asset managers. However, this application will expand in the future to include FCA-regulated asset owners and other investment products such as pensions. Overseas products are not included, however, this may change following further consultation.

UK Undertakings for Collective Investment in Transferable Securities (UCITIS)

Investment company with variable capital (ICVC), that is, a UCITS scheme without a separate management company

Full scope UK Alternative Investment Fund Managers (AIFM)

The SDR regime includes six overarching developments which include:

Sustainable investment labels: a fundamental aspect of the new regime designed to help prevent greenwashing, and increase clarity around the different types of sustainable investment products available

Consumer-facing disclosures: requirements designed to help consumers navigate the sustainability-related features of the investment product

Detailed disclosures: requirements intended to make sustainability-related information more accessible including pre-contractual, ongoing, and entity-level disclosures

Naming and marketing rules: introduces restrictions around using sustainability-related terms unless the investment product meets sustainable investment labelling criteria

General anti-greenwashing rule: applicable to all firms that require sustainability-related claims to be fair, clear, and not misleading

Requirements for distributors: designed to ensure that product-level information is made available to consumers

Below outlines the provisional key dates of the new regime’s implementation:

Sustainable investment label classifications are non-hierarchical and are instead developed to meet the various needs and preferences of consumers. Firms must decide if they want to apply sustainable investment labels to their products and assess whether the products meet the qualifying criteria. Products that are not labelled must meet naming and marketing rules and all labels are mutually exclusive.

Products without a sustainable objective but which engage in strategies like ESG integration, exclusion/negative screening, or ESG tilts would not qualify for a sustainable investment label. Investment products must meet general criteria in addition to label-specific criteria.

General criteria for sustainability labels include:

Sustainability objective: products must include an explicit environmental and or social sustainability objective

Investment policy and strategy: a firm's investment policy and strategy must be aligned with its product's sustainability objective

KPIs: rigorous and evidence-based KPIs must be outlined to measure the performance of the sustainable product against its sustainability goals

Resources and governance: a firm must engage appropriate resources, governance, and organisational arrangements to ensure the outcome of the products sustainability objective

Investor stewardship: a firm must maintain its investor stewardship strategy and resources are consistent with the product's sustainable objective

Sustainable Focus: In addition to financial risk/return objectives, this product will have an objective of investing in assets that are environmentally and/or socially sustainable. This label requires a minimum investment of 70% in assets that meet a credible standard for environmental and/or social sustainability.
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Sustainable Improvers: Products under this label are not expected to have social or environmentally sustainable initiatives initially, but have the potential to improve the sustainability of assets over time, including in response to the stewardship influence of the firm. Stewardship refers to the ‘responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society as defined by the UK Stewardship Code 2020. This allows the labelling to include assets in transition to becoming more sustainable.
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Sustainable Impact: These products aim to invest in solutions to environmental or social problems and achieve a positive real-world impact. These products would commit to delivering reports on the fund's contribution to a positive environmental and/or social outcome. The sustainable impact category requires products to invest in line with a clear theory of change and outline how they select assets in line with their theory.
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Consumer-facing disclosures: designed to help consumers assess the key sustainability-related features of an investment product and complement sustainability labels. This includes the product's sustainability objective, investment approach, and performance against its objective. These disclosures are required for products regardless of whether or not they have sustainable investment labels.

Location: consumer-facing disclosures are to be made available as a new standalone document alongside documents that present other key investor information to ensure that sustainability-related information is not considered in isolation

Scope: all in-scope firms and products without labels must mark fields with “no sustainable label” and other fields with “not applicable”

Content: disclosures must include basic Information, the product label, the sustainability goal, and the approach. It also must include a summary of the key elements of the product’s investment strategy, unexpected investments (investments that are not in alignment with the sustainability approach), and sustainability metrics (relevant metrics/KPIs)

Frequency: proposed first disclosure date is 30 June 2024 and annually thereafter

Disclosures at the product and entity levels: designed to provide institutional investors with additional information regarding sustainable investment products without increasing the burden on firms. As a result, the SDR proposes these disclosures be made in preexisting documentation like the fund prospectus and sustainability reports.

Pre-contractual disclosures: all products using a sustainable investment label must make a pre-contractual disclosure with qualifying criteria in the fund prospectus, to be produced prior to issuing an investment product. Sustainability-related information must be disclosed for products that have an investment label and those that do not have a label but in which sustainability-related features are a prominent part of their investment strategy (eg. where the product has specific sustainability features and the firm has specific policies and procedures related to those features). The disclosure must include:
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Sustainability product report: requires firms to produce ongoing disclosures on the sustainability-related performance of their investment products in a dedicated sustainability report. This is only required for products that qualify for a sustainable investment label. The content of these reports must include:
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Entity-level disclosures: build on the FCA’s TCFD entity-level disclosure requirements expanding the scope to include the four pillars (governance, strategy, risk management, and metrics and targets). All in-scope firms, regardless of label usage, will be required to develop an entity-level sustainability report detailing how firms are managing sustainability-related risks and opportunities.

Product names and marketing materials: prohibits in-scope firms that do not qualify for a sustainable label from using sustainability-related terms including, but not limited to, ESG, climate, impact, sustainable, responsible, green, SDG, Paris-aligned, or net zero.
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Anti-greenwashing rule: applicable to all FCA-regulated firms establishing that all sustainability claims must be proportionate to the sustainability profile of the product. This will include specific rules to challenge firms that are potentially greenwashing products including enforcement action.

Figure 1 highlights the proposed requirements, actions that firms and other stakeholders will be required to take, and how they align with the FCA’s goals

The SDR has been positively received thus far from sustainable investment bodies like the UK Sustainable Investment and Finance Association. However, there are some key differences between the SFDR and SDR that could increase the reporting burden for funds marketed to both the EU and UK.

The regimes adopt different criteria and implement different reporting requirements that further complicate an already complex sustainable finance regulatory landscape. Notably, entity-level disclosures are not aligned between the UK’s SDR, US requirements for investors, and the EU’s SFDR.

The UK SDR has received some criticism for not going far enough in defining what constitutes green investing. Instead, it focuses on mitigating greenwashing and ensuring that firms are doing what they say they are doing through its strict labelling criteria. The FCA is relying on the upcoming UK Green Taxonomy to formally define sustainable investment products.

The absence of a definition for sustainable investment products may allow investments in oil, gas, and coal under the regime which may slow the flow of capital away from fossil fuels, which is urgently needed. Depending on its content, this could still be the case once the green taxonomy is published.

Considerations for asset managers and next steps

The SDR is a response to the increase in UK-listed responsible investment funds, which grew 64% in 2021 to reach £79 bn. The SDR is guided by ISSB standards and designed to complement existing requirements and additional proposed requirements including the mandatory TCFD climate-aligned disclosures.

Complying with the SDR will be a significant undertaking for UK asset managers and funds. The FCA estimates that around 450 funds and over 1,500 asset managers with over £10.6 trn in AUM will be impacted by the new regime. While some of the components of the regime come into effect on a rolling basis, others like the anti-greenwashing rule, are fast approaching.

All UK firms should familiarise themselves with the FCA’s mapping exercise to determine the extent to which their products will be impacted by the regulations. Firms with existing sustainability products should similarly determine the extent of adjustments needed to ensure their products are compliant with SDR criteria.

Firms without sustainability products should determine the extent to which their products will be impacted by the naming and marketing regulations.

Compliance with the SDR will require some firms to invest in data sourcing, human resources, and IT capacity. As a result, firms should familiarise themselves with the impending regime and assess its impacts so that they are prepared when it comes into effect.

Following the release of the proposed SDR consultation paper, the FCA will undergo a process of review and feedback that will finalise the new rules for investment products. The finalised regime is expected to be released in mid-2023. The FCA intends to expand on the proposals and their scope over time in response to international and domestic market developments.

Expand the scope of the requirements to overseas products

Introduce rules for financial advisors to ensure that sustainability matters are taken into account in their investment advice

Adapt TCFD-aligned disclosure rules for listed issuers to reference ISSB standards

Build on TCFD-aligned disclosure rules regarding transition plans

Design product-level disclosure requirements to include relevant disclosures once the UK Green taxonomy is developed

Expand on product-level disclosure requirements including adding a baseline of core sustainability-related metrics

Include more specificity to disclosure requirements for various sustainability topics in line with future ISSB standards

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A Guide to the UK’s SDR & Anti-Greenwashing Regulations

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