The UK's Financial Conduct Authority (FCA) Publishes Final Disclosure and Labelling Rules for ESG Funds

The Financial Conduct Authority (FCA) has published its final disclosure and labelling rules for ESG funds. The new package of measures is designed to help investors navigate the market for sustainable investment products.

• An anti-greenwashing rule for all authorised firms.
• Definitions for product labels that help investors understand what their money is being used for based on clear sustainability goals and criteria.
• Naming and marketing requirements so products can't be described as having a positive impact on sustainability when they don’t.

The FCA seems to have taken most of the feedback it received from market participants in response to its draft regulations on board and made the final rules simpler, less prescriptive, and more principles-based. The rules directly put the onus on product manufacturers to provide evidence of their sustainability claims. Product manufacturers will need to formulate their sustainability standards and demonstrate the standards' robustness. Their standard must be based on a methodology or approach that is determined by industry practice, an authoritative body (e.g., EU taxonomy) or proprietary standards.

Additionally, the FCA has agreed that products invested in a mix of assets that are already sustainable, have the potential to improve their sustainability over time, and/or aim to achieve a positive impact should have a place in the labelling regime. This gives consumers a consistent approach when navigating the market for products seeking to achieve positive sustainability outcomes. Following further consumer testing, the FCA also added a new label called ‘Sustainability Mixed Goals’ to accommodate these products.

Sustainability Label Summaries

In keeping with the rest of the regime, firms using the ‘Sustainability Mixed Goals’ label will need to meet the requirements under the specific criteria for each of the three other labels the fund is invested across:

Summary of the key features of a Sustainability Impact label:

• The sustainability objective must be 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 product'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 product invests in and the firms’ investment activities.
• As with all labels, firms must have and carry out an escalation plan in cases where assets are not demonstrating sufficient progress towards the sustainability objective.

Summary of key features of a Sustainability Focus label:

• The sustainability objective must be 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
• A minimum of 70% of a Sustainability Focus product’s asset must meet that standard, and other assets must not be in conflict with the sustainability objective
• For all labels, independent assessment to confirm the standard is fit for purpose may be obtained via either internal processes or third parties, provided that the chosen method is independent from the manager’s investment process
• The product may invest according to themes, provided that the requirements above are met

Summary of key features of a Sustainability Improvers label:

• The sustainability objective must be 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 by which the product and/or its assets are expected to meet the standard, including short and medium-term targets. They must also obtain robust evidence to satisfy themselves that the assets have the potential to meet the standard.
• Firms’ investor stewardship strategy should support delivery of the objective and help to accelerate improvements in sustainability over time.
• KPIs must be relevant to the product’s sustainability objective and are therefore not prescribed. As with all labels, KPIs can demonstrate progress of the product or individual assets towards the sustainability objective.

The full policy statement can be accessed here.

The Anti-greenwashing rule and guidance comes into force on 31^st May 2024 with firms able to use the new labels from 31 July 2024. The naming and marketing rules come into force, with the accompanying disclosures, on 2nd December 2024.

Ongoing product-level and entity-level disclosures for firms with AUM > £50bn follow a year later on 2^nd December 2025, with the same requirement for firms with AUM > £ 5bn on 2^nd December 2026.

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