Sustainability Transparency

The UK’s Financial Conduct Authority (FCA) announced final updates to its Sustainability Disclosure Requirements (SDR), including a new investment label, eased stewardship-asset link requirements, and an updated implementation schedule.

These changes, aimed at reducing greenwashing and enhancing the sustainable investment sector, respond to consumer demands for impactful investments. FCA ESG Director Sacha Sadan highlighted the role of these measures in maintaining the UK’s leadership in sustainable finance.

There is a lack of investor confidence surrounding sustainability-related claims, calling many investments into doubt. This has been compounded by the lack of consistency surrounding terms such as ‘green’, ‘ESG’ and ‘sustainable’.

The FCA’s policy statement PS23/16, issued on November 28, 2023, paves the way for new anti-greenwashing regulations. Key dates include:

• 31 May 2024: Enforcement of anti-greenwashing rules begins.
• 31 July 2024: Firms can start using new labels and disclosures.
• 2 December, 2024: Naming and marketing regulations activate, requiring disclosures.
• By end of 2025: Firms managing assets over £50 billion must make ongoing detailed disclosures.
• 2 December 2026: Disclosure requirements expand to firms with assets over £5 billion.

The introduction of a fourth “sustainability mixed goals” label for diverse asset funds poised for sustainability growth. This sits alongside slightly modified existing labels: “sustainable focus” which requires 70% of investments to have a sustainability objective; “sustainable improver” which selects assets for potential sustainability gains with targets; and “sustainable impact” which focuses on solution-based investments, minus the “real-world impact” terminology. Funds can now self-assess investment strategy credibility without third-party verification and must declare their stewardship approaches.

The FCA has refined its stewardship guidelines for funds seeking the “improvers” label, acknowledging the varied nature of stewardship, and allowing strategies at either the firm or product level without prescribing specific actions. This move addresses concerns that the “improvers” category might be too broadly defined, and stewardship too rigidly dictated. Consequently, the FCA no longer requires firms to demonstrate direct impact of stewardship on assets.

The FCA’s recent ESG fund review highlighted a general shortfall in effective stewardship, with many firms failing to connect stewardship activities to their funds’ objectives. In response, the FCA insists that funds with labels must clearly explain their stewardship roles and actions taken when objectives are not met.

Additionally, the FCA is working to enhance stewardship transparency, including a new Vote Reporting Group to help explain voting decisions to asset owners and consumers. By the end of 2025, large firms with assets over £5 billion will disclose their comprehensive sustainability actions, including stewardship, with these requirements extending to all firms thereafter.