The SDR policy statement has landed...

This communication is intended for insurers, reinsurers, asset managers, banks, and building societies only. It is published for informational purposes only, and does not constitute advice. 

The Policy Statement for Sustainability Disclosure Requirements (PS23/16) was issued by the Financial Conduct Authority (FCA) on 28th November 2023. There had been a delay in this publication while the FCA absorbed the consultation responses from CP22/20, so let’s firstly look at the notable changes from the consultation.

Updates to the consultation

The implementation dates have changed significantly, giving providers more time to get organised. The first rule on anti-greenwashing was expected to be implemented immediately, however, the date for this has been pushed out to May 2024. Since this is effectively a reminder that communications should be clear fair and not misleading, this shouldn’t be too onerous for the industry. Over the next 6 months, firms should have sufficient time to review all materials and there is some additional guidance, GC23/3, which will provide extra support for product providers. The additional guidance is open for consultation, and says that any references to sustainability should be:

• Correct and capable of being substantiated

• Clear and presented in a way that can be understood

• Complete – which means that it should not omit or hide important information

• Fair and meaningful in terms of any comparisons that are made to other products or services (for example, a firm can’t say ‘this is the greenest bond’)

To aid with implementation, the FCA has provided some simple examples to expand on the above points. Feedback on the consultation is required by 26 January 2024. Other important implementation dates have also been extended a little further, which will hopefully ease the pressure on firms:

• The new sustainability labels can be used from 31 July 2024

• The naming and marketing rules come in on 2 December 2024

• Product and entity level disclosures are required for larger firms by 2 December 2025

• Entity level disclosures are required for smaller firms by 2 December 2026

On the labelling, the FCA has changed the word ‘Sustainable’ to ‘Sustainability’ and in addition to the ‘Impact’, ‘Focus’ and ‘Improvers’ labels, a fourth label of ‘Mixed Goals’ has been introduced. This new label is in response to the request to accommodate funds that invest in a blend of strategies and should be used for funds that invest across different sustainability objectives.

Action required

As a priority, firms will want to ensure that they have uncovered and then removed any possibility of greenwashing before the May deadline.

Then, turning attention to the use of the new labels, the FCA has said that firms will be responsible for choosing the classification and for ensuring that the label is and remains appropriate. This will need careful governance and stewardship and firms will need to be comfortable that the label is a suitable fit, under 5 key areas:

• The sustainability objective of the fund

• The investment policy and strategy (noting that at least 70% of the product’s assets must be invested in accordance with its sustainability objective)

• Key Performance Indicators which must be identified to measure progress against the sustainability objective

• The resources and governance arrangements that are in place to support the delivery of the sustainability objective

• The stewardship strategy needed to support the sustainability objective. This will involve having an escalation plan for when KPIs are breached

Although the implementation dates for the new labels have been extended, the work on being able to use these should start immediately, particularly if firms want to maximise any benefits from this regulation. The Financial Lives survey, Hymans Robertson’s consumer survey and others tell us that the topic of investing sustainably is important for customers. Individuals are keen to understand how their money is being invested and if it is doing good for the climate and other sustainability matters. By embracing the new labels, firms will allow customers to distinguish between different sustainability criteria and make their investment choices accordingly.

The naming and marketing rules will also need careful consideration and some providers may want to consider these rules at the point of doing their anti-greenwashing activities to allow for an initial review of any potential breaches.

These are just the first steps and in time, attention will also need to be given to the product and entity level disclosures. While there is a lot of work ahead, this is likely to be a positive step in the journey to clear consumer messaging around sustainability in the financial services industry.

If you would like to discuss anything SDR related with our team, please get in touch.

This blog is based upon our understanding of events as of 30 November 2023. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation.