FCA's published Sustainability Disclosure Requirements and Investment Labels Regime: A pivotal step for sustainable investing

In this article, the following areas will be explored:

• The role of the SDR regime in addressing greenwashing concerns in the growing market for sustainable investments
• The key components of the SDR regime and its implementation timeline
• The SDR regime’s interoperability efforts and distinction from SFDR
• Practical next steps for navigating the new SDR regime
• Ramboll's approach to supporting clients with sustainable and responsible investing strategies and the applicable related regulations

The SDR regime comprises a robust anti-greenwashing rule, four non-hierarchical investment labels, and comprehensive disclosure and marketing guidelines. It aims to empower investors with greater clarity and confidence in making informed decisions about their sustainable investments. The regime is a crucial component of the UK's Greening Finance Roadmap to Sustainable Investing and marks a critical step towards creating a more sustainable future for the UK.

The FCA's journey towards finalising these rules follows the review of a consultation paper from October 2022, which was prolonged due to the sheer volume of responses. The outcome is a regime that will without doubt reshape the landscape of financial sustainability disclosures as it introduces six components for UK firms in scope:

1. Anti-greenwashing rule: the rule mandates fairness and clarity in all sustainability-related claims made by FCA-authorized firms. In summary, the expectation of this rule is that “firms’ sustainability-related claims about their products and services should live up to what they are claiming, and firms should have the evidence to back them up”.

2. Four investment labels: To facilitate informed decision-making, the SDR introduces four non-hierarchical labels that represent distinct sustainability objectives. The four labels are:

Figure 2: Overview of the four investment labels based on the policy statement

Click to find selected characteristics and examples of how the labels are to be interpreted

Using a label requires meeting both general and specific criteria across five themes. The generic criteria associated with these themes are:

• Sustainability Objective: Products with the label aim to achieve positive environmental and social impacts, while also acknowledging and revealing any potential negative outcomes. This means that products must not only strive for positive sustainability outcomes but also mitigate any risks or harm they may cause to the environment or society.
• Investment Policy and Strategy: At least 70% of the gross value of the investment product's assets must be invested in accordance with its sustainability objective. The product’s assets must be selected with reference to a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability. This standard can be derived from industry practice, authoritative bodies, or proprietary criteria, could involve environmental or social considerations, reference established taxonomies like the EU or upcoming UK Green Taxonomy, or set specific greenhouse gas emission thresholds.
• Key Performance Indicators (KPIs): Products must set clear KPIs to measure progress towards the defined sustainability objective, the SDR regime does not prescribe KPIs. These KPIs can be applied to the entire product or to individual assets within the product, depending on the nature of the investments.
• Resources and Governance: Firms must establish adequate resources, governance, and organizational structures to effectively support the achievement of the sustainability objective.
• Stewardship: Disclosure of a comprehensive strategy outlining expected activities and outcomes supporting the sustainability objective, along with an escalation plan for assets not meeting set objectives while ensuring they stay within the 70% threshold.

3. Naming and marketing rules: All FCA-authorised firms are subject to the anti-greenwashing rule. Sustainability-related terms can only be used in product names and marketing if the firm uses a label or if they do not use a label but use sustainability-related terms that comply with product names and marketing rules set out. For the later one of such rules is for example, that “the product must have sustainability characteristics and the product’s name must accurately reflect those characteristics, but the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms must not be used.”

4. Consumer-facing information: clear and concise disclosures containing provision of information about the sustainability objectives, investment strategy, metrics, and access points for additional information, enabling better-informed decisions for consumers. It must be reviewed and updated annually within a 2-page limit.

5. Detailed disclosures: Detailed information in pre-contractual, ongoing product-level, and entity-level disclosures, targeted at institutional investors and consumers seeking more information.

6. Requirements for distributors (such as financial advisers and platforms) to ensure that product-level information (including the labels) is made available to consumers.

Figure 3: The phased-in implementation timeline of the SDR regime for products using a label or using sustainability-related terms in their naming and/or marketing without a label

Firms remain responsible for their classification and ensuring the label is appropriate. Whilst independent verification for label usage isn't mandatory, the FCA will apply its typical supervisory and enforcement approaches.

Interoperability challenges in sustainability reporting can make it difficult for investors and asset managers to compare and assess the sustainability performance of different products. This is because there are multiple different frameworks and a lack of a common language for sustainability reporting. The FCA has recognized this challenge and has taken steps to address it. They have aligned the SDR with leading international corporate reporting standards such as the TCFD, ISSB, SASB, and GRI to create a more consistent and transparent approach to sustainable investing.

For instance, the entity disclosures that are mandatory for firms with over £5 billion AUM in an annual ‘sustainability entity report’ align with TCFD's four pillars. This requires firms to disclose governance, strategy, risk management, and metrics for sustainability-related risks and opportunities. The FCA has recommended the ISSB's Sustainability Disclosure Standard (IFRS S1) as a helpful reference point for asset managers, while SASB standards may be used to tailor disclosures to specific client interests.

However, there is a challenge with the Sustainable Finance Disclosure Regulation (SFDR). The SFDR was not intended as a labelling and marketing tool, as emphasized by European authorities. This has given rise to informal designations such as "dark green" for Article 9 disclosures and "light green" for Article 8 products, suggesting a hierarchical approach to the product categories. In contrast, the UK's SDR takes a distinct approach by placing labelling at its core, accompanied by specific qualifying criteria. The FCA has noted that there is no exclusive mapping between Articles 8 and 9 to the SDR labels, and "Article 8 funds would need to level up to qualify for the SDR labels."

Therefore, the FCA has summarized relevant information under SFDR that firms may leverage to comply with the SDR regime requirements. The outcome is a clear distinction between the regimes, which may present challenges for asset managers captured by the scope of both frameworks or those seeking to voluntarily disclose. It is important to note the key distinctions between the regimes.

Download an overview of the key differences between the SDR and SFDR.