UK Sustainability Disclosure Requirements (SDR) updates

The goal of the Sustainability Disclosure Requirements (SDR) is to improve trust in, and transparency of, sustainable investment products and to minimize greenwashing via enhanced disclosure requirements and the use of sustainability labels.

The final rules and guidance were published by the Financial Conduct Authority (FCA) on Nov. 28, 2023. The requirements include the following:

• Disclosure requirements for funds promoting environmental or social characteristics, including the production of certain documents including a new 2 page “consumer facing disclosure”.
• Four sustainability labels to help consumers navigate the product landscape and enhance trust.
• An anti-greenwashing rule to ensure sustainability-related claims are fair, clear, and not misleading and capable of being substantiated with credible evidence.
• Naming and marketing rules to ensure the use of sustainability terms¹ are accurate and proportionate.
• Entity-level information to understand asset managers’ sustainability approaches.
• Requirements for distributors to ensure product information is available to consumers.

¹ESG 4.3.2R(1) provides a list of sustainability-related terms, more information can be found on page 37 in the FCA policy statement here: https://www.fca.org.uk/publication/policy/ps23-16.pdf.

SDR created four labels for investment products which are voluntary and became available for firms to adopt from the 31st July 2024. The labels are non-hierarchical (i.e. not intended to be on a spectrum of “light green to dark green”), and instead are intended to offer different options to investors.

Summary of SDR Labels and Objectives

Sustainability Focus - Invests mainly in assets that focus on sustainability for people or the planet.

Sustainability Improvers - Invests mainly in assets that may not be sustainable now, with an aim to improve sustainability for people or the planet over time.

Sustainability Impact - Invests mainly in solutions to sustainability problems, with an aim to achieve positive impact for people or the planet.

Sustainability Mixed Goals - Invests mainly in a mix of assets that either focus on sustainability problems, aim to improve their sustainability over time, or aim to achieve positive impact for people or the planet.

If a firm chooses to label an investment product, it must ensure that the classification and label are appropriate.

Common features of the labels are that they all require at least 70% of assets to be invested in accordance with the sustainability objective of the label and follow “a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability.”

The labels, naming and marketing rules, and disclosure and reporting requirements apply to funds promoting environmental or social characteristics and domiciled in the U.K.

Distributors of investment products in the U.K., such as financial advisers and platforms, have targeted rules to ensure that labels and consumer-facing disclosures are made available to retail investors.

The anti-greenwashing rule applies to all FCA-authorized firms who make sustainability-related claims about products and services; this includes communications made to persons in the UK from an overseas jurisdiction.