With elements of the Financial Conduct Authority's new UK sustainability disclosure requirements already underway, much of the focus and coverage have been on asset managers, particularly over sustainable fund product labelling.
However, advisers must equally ensure that their own offerings and promotional materials comply with the new anti-greenwashing rules and guidance, while making sure that they understand their clients’ sustainability preferences and any potentially suitable funds under the new regime.
The SDR currently applies to UK-domiciled funds.
Anti-greenwashing rule
Thinking about the requirements chronologically, the first phase of the SDR, which already affects advisers, is the anti-greenwashing rule, which came into effect at the end of May 2024.
This requires FCA-authorised firms who make sustainability-related claims about their products to substantiate them.
Essentially ensuring that firms do not over-sell or provide inconsistent information about the green or sustainable characteristics of their products and services, and provide communication that is fair, clear and not misleading.
The key points to remember is that the FCA expects references to sustainability to be:
- correct and capable of being substantiated;
- clear and presented in a way that can be understood;
- complete – communications should not omit key information and should consider the product/service life cycle; and
- fair and meaningful in relation to any comparisons.
Therefore, advisers who might be promoting investment advice services or advisory model portfolios will need to check that any labelling or disclosures related to sustainability are easily understood by clients and transparent.
The anti-greenwashing rule also remains consistent with the FCA’s consumer duty, where communications should be understood by clients and thus this information enables clients to make effective, timely and properly informed decisions.
In practice this means ensuring any client communications, such as marketing materials, presentations, factsheets or advertising have accurate references to any environmental or social characteristics to confirm there is no greenwashing.
Using one of the FCA’s own examples in the anti-greenwashing rule, this also extends to visual presentations such as logos, images and colours.
Even if the claim or wording is correct and clear, if the visual image gives a different impression, then this would not be permitted under the new regime.
The FCA is not prescriptive here but asks firms to consider how the principles of SDR may apply to their business and the claims they are making when using visuals to make sustainability-related claims.
Product labelling and ensuring client understanding
The next major element of SDR refers to fund labels and disclosures, introduced by the FCA to help clients navigate the sustainable investment market.
As a reminder, from the end of July asset managers and firms have been able to apply for the main sustainable labels for their funds ahead of the December 2 2024 deadline, when the naming and marketing rules take effect.
Asset managers intending to use labels must ensure funds meet the qualifying criteria under five overarching principles: sustainability objective, investment policy and strategy, key performance indicators, resources and governance, and stewardship.
Notably, under the investment policy and strategy requirement, at least 70 per cent of a fund’s assets must be invested in accordance with the associated objective of the label the firm wishes to apply.
