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Sustainability Disclosure Requirements (SDR) – EVORA Insights
New sustainability disclosure requirements (SDR) and a labelling system for investment products have been released by the UK’s Financial Conduct Authority, with some requirements set to take effect as soon as 2024.
On November 28th 2023, the Financial Conduct Authority (FCA) released the long-anticipated Sustainability Disclosure Requirements and investments labelling system. The regime has been described as the UK’s response to the European Union’s (EU) Sustainable Finance Disclosure Regulation (SFDR) but, though similar in some ways, differs significantly to SFDR in its scope and requirements.
In this Insight, our Sustainable Finance team has analysed and distilled the 200pg+ SDR document into key points. We will examine:
- The rationale of SDR
- The scope and who is impacted
- The investment labels and other requirements
- Timelines for implementation
- Next steps
Earlier this year, the UK Government reaffirmed their commitment to a Green Finance Strategy, setting out plans to position the UK as the world’s first net zero-aligned financial center and a leader of sustainable finance on the global stage. Key to the net zero strategy is the financial sector, which will be pivotal in providing the capital necessary to decarbonise the UK.
A cornerstone of the ambitious strategy is the introduction of sustainable disclosure requirements, originally set out in the Greening Finance Roadmap published in 2021. SDR stems from the UK Government’s position that the UK financial sector requires a regulatory and disclosure framework to ensure that consumers are protected and asset managers are taking the appropriate steps to address greenwashing. SDR has been long awaited by the market, and EVORA welcomes the news that the regime will come into effect in early 2024.
The FCA, tasked with drafting the regime, have stated that their approach has been unpinned by 3 principles:
- Help consumers navigate an increasingly complex investment product landscape
- Empower consumers with information to help them direct their capital towards sustainable products
- Give customers confidence in sustainability products
Additionally, the FCA have emphasized that any requirements they publish will balance principles and prescriptions, to stimulate action and encourage impact without making the regime too strict or rigid. Additionally, the FCA has acknowledged the importance of creating a regime that achieves international coherence with other schemes such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), to reduce the administrative burden for asset managers. It remains to be seen how interoperable SDR will be with other frameworks and reporting standards.
The requirements apply to UK asset managers and firms under the FCA’s authority who are making sustainability-related claims within their marketing and naming of products, and those that will use one of the sustainable investment product labels prescribed by the regime. The regime also sets out rules for distributors of investment products.
- Entities – UK authorised fund managers (UCITS management companies, full-scope AIFMs, small authorised AIMs
- Funds – Authorised and unauthorized UK funds
- Anti-greenwashing rule – All UK FCA authorised firms
Overseas products and portfolio management services are currently exempt, but the Treasury has indicated that it reserves the right to expand the regime in the future, and may take this step if it is deemed necessary to promote and protect sustainable finance in the UK.
- Non-UK funds marketing in UK
- Non-UK AIFs managed by UK AIFMs
- Portfolio managers
From December 2025 entity-level disclosures will apply to firms with AUM of £50bn<, and from December 2026 the disclosures will apply to firms with AUM of £5bn<.
If you think you will be captured by SDR, EVORA recommends consulting your legal counsel.
The labelling system and requirements
SDR sets out a range of requirements for firms and investment managers to consider. However, the centerpiece of the regime is undoubtedly the opt-in sustainable investment product labels. In the FCA’s consultation paper, released early this year, the regime set out 3 labels. However, after a lengthy consultation period in which the FCA engaged key stakeholders, the FCA has added a fourth label.
The 4 labels are:
- Sustainability Impact
- Sustainability Focus
- Sustainability Improvers
- Sustainability Mixed Goals [NEW]
As the names suggest, each label is associated with a different sustainability objective. Improver funds are required to invest in assets that have the potential to improve environmentally or socially over time. Focus funds are required to invest in assets that are environmentally and/or socially sustainable. Impact funds are required to invest in assets that achieve a positive and measurable impact in relation to environmental and/or social outcomes.
To use a label, a firm will have to meet the prescribed qualifying criteria for the label. In all cases, 70% of the fund’s investments must align with the qualifying criteria. Finally, there is the mixed goals label, which can be used for funds with more than one sustainability objectives, effectively blending the 3 other labels together under 1 label. As with the other labels, 70% of the overall fund’s investments will have align with a combination of objectives, and firms must identify the proportion of assets aligned with accordance of each label.
Beyond the labelling system, SDR sets out naming and marketing rules and a general anti-greenwashing rule, designed to restrict the use of ESG and sustainability-related terminology by funds which are not using a label.
Those familiar with SFDR will be likely see similarities between SDR’s pre-contractual, ongoing disclosures and entity-disclosures and disclosures set out by the EU. However, the two regimes take a different approach to disclosures. Under the EU’s SFDR disclosures are templated and follow a strict format. The SDR regime sets out disclosure principles designed to guide disclosures. Whilst there are required topics to include in disclosures, it is not as heavily prescribed as in SFDR. Additionally, disclosure requirements differ between funds that use a label and those that don’t. The disclosures are intended to inform consumers and promote consistent use of ESG-related language.
As with most regimes, the implementation of SDR will be staggered. This will give firms and asset managers time to prepare for the upcoming requirements, make any amendments to their product naming and marketing, and consider whether they want to use a label or not.
The regime comes into force in May 2024, starting with the general anti-greenwashing rule that restricts the use of sustainability-related language in communications about financial products or services. The regime ramps up over the course of 2 years, with the introduction of labels and disclosure requirements in mid 2024. Finally, entity-level disclosures will be introduced for large firms in 2025 and for small firms in 2026. The complete timeline for implementation is detailed below.
31st May 2024
– Anti-greenwashing rule comes into force
31st July 2024
Labels, consumer-facing, pre-contractual disclosures, and naming and marketing rules come into force for firms using labels.
From 31st July 2024
Ongoing product-disclosures must be published 12 months after first use of label and annually thereafter or provided to eligible clients on demand from 2nd December 2025
2nd December 2024
Consumer-facing, pre-contractual disclosures, and naming and marketing rules come into force for firms using sustainability-related terms, but not using a product label.
From 2nd December 2024
Ongoing product-level disclosures must be produced annually after first use of sustainability-related terms and annually thereafter
2nd December 2025
Entity-level disclosures required for firms with £50bn< AUM
2nd December 2026
Entity-level disclosures required for firms with £5bn< AUM
The FCA expects firms and asset managers in scope of SDR to keep in mind Consumer Duty. This means firms should:
- Act in good faith to deliver sustainability-related products and services
- Avoid causing foreseeable harm, including harm caused by greenwashing and unsuitable products
- Enable and support customers to pursue their financial objectives, including sustainability-related needs and preferences as part of their investment objective
The FCA will be reviewing any firms choice to label a product to ensure that the choice and use of a label is appropriate. The FCA reserves the power to take enforcement action where they believe there are compliance issues or where firms are not meeting the requirements. To support the implementation of SDR, the FCA will be provide support to the industry through stakeholder engagement, webinars, and events. Additionally, the FCA intends to release further guidance on its rules, and will open a consultation in the near future on how the regime can be expanded. This includes a consultation on the anti-greenwashing guidance, which is open until 26 January 2024.
All authorized firms should:
- Prepare for the new rules
- Ensure they understand the rules and participate in the consultation process
All UK asset managers should:
- Decide which labels are appropriate, and determine if they meet the qualifying criteria
- Familiarise themselves with the requirements
All distributors should:
- Prepare to provide the necessary information (ie labels and disclosures) available to consumers
- Prepare to add notices to overseas funds to inform customers that they are not subject to the SDR regime
Get in touch with our sustainable finance team today to see how EVORA can help you with your sustainability-related disclosures.