On 25th Oct 2022, the FCA published its “Sustainability Disclosure Requirements (“SDR”) and investments labels” Consultation Paper (CP 22/20).

The aim of the paper is to outline the FCA’s stance on greenwashing as concerns grow that investment funds are making ESG-related claims that have been misleading and/or unsubstantiated, failing to stand up to scrutiny. 

In this article, we will discuss why the FCA have felt the need to consult on this further, what the new rules are and who they will affect.


Why The FCA Is Consulting

A year ago the FCA made it clear that tackling greenwashing was a core regulatory priority, publishing a strategy on their ESG priorities that set out the role of the financial services industry in assisting the UK economy’s transition to a net zero future. 

A cornerstone of the strategy is the importance of building trust and integrity in sustainable instruments, products and the supporting ecosystem, ensuring consumers can rely on the claims being made and are protected from greenwashing. 

However, there have been growing concerns regarding exaggerated and inaccurate sustainability claims from firms about their products, putting consumers in harm’s way and making it difficult for them to make informed decisions.

If consumers can’t trust the claims firms are making, they will be less inclined to invest in this market. This will slow the flow of much-needed capital to investments that could drive positive change for the globe. 

The FCA ‘want the UK to be a trusted centre for sustainable investment… at the forefront of sustainable investment internationally.’ To achieve this, they have put in place robust regulatory standards to protect consumers and ensure the foundation on which sustainable investment products stand is solid. 


The Proposed New Rules

This latest consultation paper outlines a number of new rules, primarily aimed at the asset management industry.


1 – Product Labels for Sustainable Investments. 

The FCA is proposing three categories of product labels for sustainable investment, based on the sustainability objective they are trying to achieve: 

  • Sustainable Focus – for assets that are environmentally and/or socially sustainable
  • Sustainable Improvers – for assets aiming to improve environmental and/or social sustainability
  • Sustainable Impact – for assets that offer solutions to environmental or social problems, aiming to achieve positive, real-world impact

There will be no hierarchy between these labels and it won’t be mandatory for firms to label their products. Moreover, firms that want to label their products will need to meet certain qualifying criteria to ensure consumer protection against greenwashing. 

2 – Consumer-Facing Disclosures

These are intended to help consumers understand the key sustainability-related product features.

3 – Detailed Disclosures

These disclosures are more targeted towards a wider audience, including institutional investors as well as consumers looking for more detailed information. The detailed disclosures should be in the following formats:

  • pre-contractual disclosures (e.g. 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
  • a sustainability entity report covering how firms are managing sustainability-related risks and opportunities

4 – Naming and Market Rules

To restrict the use of certain sustainability-related terms in product names and marketing materials, unless the product uses a label. 

5 – Requirements for Distributors

Ensuring that all product-level information, including the labels, are made available to consumers.

6 – A General ‘Anti-Greenwashing’ Rule

Applicable to all regulated firms, reiterating the existing rules that sustainability-related claims must be fair and never misleading. 

Initially, these rules will be focussed on UK-based products, however, they will eventually seek to expand them to overseas products offered by FCA-regulated firms. 


Expected Outcomes Of The New Rules

The implementation of these new regulations from the FCA are intended to increase transparency on the sustainability claims of products and firms as well as to reduce the risk of greenwashing.

By implementing the new labels and disclosures outlined above, the FCA is giving consumers the ability to compare products more effectively and efficiently, with the hope it will lead to increased competition between similar products. 


The proposed requirements, the actions that firms and other stakeholders will need to take, and how these will support the FCAs target outcomes.


Who Do The New Rules Apply To

These proposals will be of interest to all FCA-regulated firms due to the ‘Anti-Greenwashing Rule’ which will be applicable to all. The labeling, disclosure, naming and marketing rules will initially apply only to asset managers, however the FCA is seeking to expand these to all FCA-regulated asset owners. 


How Will The New Rules Be Measured and Supervised?

The FCA will monitor and review the characteristics of labeled products to assess whether they meet the criteria laid out in this Consultation Paper. They will also closely monitor how they are performing. There will also be a sustained assessment of the usefulness of these labels, and the FCA will consult with consumers through their Financial Lives Survey and with consumer groups such as Which?, before carrying out a post-implementation review after 3 years.

In terms of supervision and enforcement, the FCA will apply its usual approach to compliance issues as they arise, and may take enforcement action against firms that do not make changes to misleading disclosures or misused labels after being advised. 


When Will The New Proposals Take Effect?

The FCA will keep the consultation open until 25th of January 2023, with the aim of publishing the final rules by 30th of June 2023. 

Once published, the Consultation paper states that the general ‘Anti-Greenwashing’ rules will come into immediate effect, while the rest of the rules for labeling, disclosures, naming and marketing will apply a year later, from 30th of June 2024.

From 30th June 2025, the largest firms (asset managers with over £50 billion AUM) will be required to share an annually-published sustainability product report with smaller firms (asset managers with over £5 billion AUM) required to do so a year later, from 30th of June 2026. Regardless, the FCA encourages all necessary entities to ensure they are reviewing their ESG-related products to ensure they are ready for the changes.