UK: Sustainability Disclosure Requirements (SDR) And Investment Labels: The New Rules

Key points

• It has been a long time coming, but on 28 November 2023 the FCA finally published its policy statement setting out its rules for the new Sustainability Disclosure Requirements (SDR) regime, including a set of consumer-friendly investment labels.
  
  
• The scope of the rules is narrower than those consulted on – most of the requirements will only apply to UK collective asset management firms (UCITS managers and AIFMs) that manage UK-domiciled funds.
  
  
• In practice, this means that the new regime – certainly its flagship labelling provisions – is likely to be of limited relevance to asset managers which raise non-UK funds, including alternatives managers which are pursuing a retailisation strategy and managers of internationally based UCITS.
  
  
• One rule does apply to all FCA-authorised firms: the "anti-greenwashing rule", which will apply from 31 May 2024.
  
  
• There will also be new requirements for distributors of retail products, including those distributing (non-UK) recognised schemes e.g. EEA UCITS.
  
  
• Portfolio management and non-UK funds are out of scope for now – but future consultations are expected soon, and these well could be important.

Overview

Introduction

SDR is widely seen as the UK's answer to the EU Sustainable Finance Disclosure Regulation (SFDR), which is currently under review by the European Commission (in fact, we understand that the Commission has an eye on SDR as part of that review). While narrower in scope than SFDR in some respects, it goes further in others insofar as it provides for a set of formal product labels and imposes minimum standards for labelled­ products and non-labelled products that have ESG-related terms in their names (although some will already be familiar with the FCA's 'Guiding Principles' for authorised ESG and sustainable investment funds, which sets out expectations in terms of design, delivery and disclosure in relation to such funds).

The regime is broken down into a series of modules (set out below), some of which interact. The implementation of these will be phased. Many of the requirements build on the existing TCFD-aligned disclosure requirements under the ESG sourcebook.

The summary sections below are designed to assist firms in conducting an initial scoping exercise in order to determine which aspects of the incoming regime will apply to them and then, in respect of those aspects which will, or may, apply what their potential impact is likely to be. If you would like further information or assistance in understanding the proposals, please speak to your usual Travers Smith contact or any of the individuals at the end of this briefing.

The relevant rules have now been made and are available on the FCA's online Handbook.

• Overview: Scope and requirements
• What's out-of-scope (for now)?
• Product-level disclosures
• Entity-level disclosures – 'sustainability entity report'
• Next steps

1. Overview: Scope and requirements

The final rules reflect the proposals that the FCA had consulted on, with a tiered approach to product-level disclosures:

(a) Consumer-facing disclosures

(b) Pre-contractual sustainability disclosures

(c) Ongoing public product-level sustainability disclosures

(d) 'On-demand' product-level sustainability information.

A. Consumer-facing disclosures

The aim of these disclosures is to provide key, standardised sustainability information for consumers to make investment decisions. They should be contained in a standalone document no longer than 2 pages. The FCA has deliberately not produced a template but continues to encourage the industry to produce one.

Firms should consider how their consumer-facing (and other) disclosures are compliant with the Consumer Duty, particularly the consumer understanding outcome. This is likely to require firms to test, monitor and, if necessary, adapt their consumer facing disclosures.

B. Pre-contractual sustainability disclosures

These disclosures aim to provide more detailed sustainability information than that contained in the consumer-facing disclosures. These are intended for retail investors who want more information, or (if relevant) for institutional investors.

The disclosures should be made in either the prospectus (to the extent one is produced), information document produced pursuant to FUND 3.2 (e.g. AIFs managed by a full-scope AIFM) or "Part A" of a public product-level sustainability report (e.g. small authorised UK AIFM).

C. Ongoing public product-level sustainability disclosures

UK managed authorised or listed funds making sustainability-related pre-contractual disclosures must prepare, on an annual basis, "Part B" of a public product-level sustainability report. The report is intended to provide details of the sustainability performance of the product.

D. 'On-demand' product-level sustainability information

The rules recognise that in some instances public product level reporting would not be appropriate and that instead eligible investors (those who need information to satisfy their own sustainability-related disclosure obligations) should be able to request equivalent information "on-demand". That said, guidance encourages managers to consider providing the requisite information to a person that requests it even if they are not technically eligible.

The obligation to provide on-demand information clearly applies to funds using a label (to the extent that Part B of a public product-level sustainability report is not required), but the scope of application to other products is not entirely clear on the face of the rules. The consultation paper contemplated the obligation also applying to products which have "sustainability-related features that are integral to their investment strategy". But the final rules are more open than this.

4. Entity-level disclosures – 'sustainability entity report'

This report focuses on sustainability-related risks and opportunities. It builds on existing TCFD-derived requirements and follows the same 4-pillar approach adopted by the TCFD and ISSB on governance, strategy, risk management, and metrics and targets. Additional requirements apply where a firm has a product in respect of which product-level disclosures are being made.

The rules expressly refer to the fact that a number of global standards may be relevant in helping firms to determine what they should disclose: the TCFD's supplementary guidance for asset managers, the IFRS sustainability disclosure standard (i.e. IFRS S1), the SASB Standards and the GRI Standards (although firms are discouraged from attempting "line by line" disclosures).

5. Next steps

Firms should assess the scope of the regime carefully. FCA authorised firms who market non-UK funds to professional investors in the UK will, for now, only be affected by the new anti-greenwashing rule which will come into force on 31 May 2024. Firms should review and update their investor communications as appropriate.

Firms with UK retail funds will have a bigger lift, particularly if those products have sustainability related terms in their names. The deadline for making such products compliant with the applicable minimum requirements is 2 December 2024. FCA approval, or even in some cases investor consent, may be required in order to make the necessary changes.

There are various other requirements not detailed in this briefing which apply to those firms whose fund satisfies the general and specific qualifying criteria and who choose to use a relevant label, including prior notification to the FCA, adoption and publication of the FCA's trademarked graphic (obtainable through the FCA's online notification system), periodic review and record-keeping.

Firms should also monitor for the upcoming consultations on extending the regime, in particular, to portfolio managers and overseas funds.