Yesterday, following a lengthy and in-depth consultation, the FCA  confirmed a suite of measures designed to support the “UK's position as a world-leading, competitive centre for asset management and sustainable investment” by ensuring that “financial products that are marketed as sustainable should do as they claim and have the evidence to back it up”. The Consumer Duty is a central theme and there is clear focus on ensuring that consumers are enabled to make suitably informed investment decisions. With the stated aim of boosting investor trust and confidence in sustainable investments the FCA have put in place an “easy to understand regime” which includes requirements to ensure that sustainability related claims are “fair, clear and not misleading” , and that products are labelled, named and marketed in an appropriate way with no claims to a positive impact on sustainability that are not genuine. 

Anti-greenwashing:

A new anti-greenwashing rule will apply to all FCA authorised firms making sustainability-related claims about products and services requiring them to  ensure that all such sustainability claims are “fair, clear and not misleading”, and are genuinely aligned with the sustainability characteristics of the products or services offered. This rule is targeted at the FCA's regulatory priority of protecting consumers from greenwashing and will empower the FCA to engage with firms that it considers might be making misleading, exaggerated or unsubstantiated claims to sustainability.

The FCA has simultaneously opened a consultation on new anti-greenwashing guidance which will support the anti-greenwashing rule by clarifying the FCA's expectations of authorised firms that make claims about the sustainability of products or services and thus assist them to understand the regulator's expectations of them. The consultation is focused on the risks of “greenwashing” and has the aim of improving consumer confidence and trust in the sustainability claims made by firms about their products and services, which in turn will increase confidence in the markets and enable them to flourish. 

Broadly, the guidance proposed seeks to ensure that references to sustainability should be: factually correct and capable of being substantiated with credible evidence; clear, straightforward and presented in a way that can be understood (with any technical language explained unless the meaning is clear and widely understood); complete, not omitting or hiding any key information, and considering the full life cycle of the product or service; and fair and meaningful relative to any comparisons with other products or services. Again, the Consumer Duty is at the centre of this, with the FCA requiring that firms act in good faith towards their retail consumers, enable and support them to pursue their financial objectives, give them information that they can understand, support and enable them to make appropriately informed investment decisions, and understand and monitor consumer outcomes. 

Both the new anti-greenwashing rule and the related guidance are anticipated to come into force at the end of May next year.

Labels, naming and marketing:

The new rules on labels, naming and marketing will apply to UK asset managers and are designed to ensure the accurate use of sustainability-related terminology and ensure that firms do not make sustainability claims that are misleading or overstated.

There will be four new labels designed to assist consumers to navigate the investment product market by differentiating between different sustainability objectives and different investment approaches, the four labels labels are as follows: Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals. 

In order to qualify for the use of a label, products must meet certain specific and general criteria relating to that label, firms must meet certain requirements and there are associated disclosures that must be made. There are five key themes underpinning the general criteria: a sustainability objective to improve or pursue positive environmental and/or social outcomes as part of the investment objectives; at least 70% of the product assets must be invested in accordance with the sustainability objective; KPIs to measure progress against the sustainability objective; appropriate resources, governance and organisational arrangements to support delivery of the sustainability objective; and a stewardship strategy to support delivery of the sustainability objective. In addition, there are detailed label-specific criteria applicable to each of the four labels. 

The naming and marketing rules will apply to products that do not use one of the four labels. All authorised firms are subject to the general anti-greenwashing rule and sustainability-related terms can only be used in product names and marketing if the firm uses a label or complies with the product naming and marketing rules. Broadly, the naming rules provide that: the product's name must accurately reflect its sustainability characteristics (but the terms “sustainability”, “sustainable” and “impact” must not be used); the same type of disclosures are required as for labelled products; a prominent statement must be published clarifying that the product does not have a label and explain why; and feeder fund products must only use in its name terms consistent with those used by the relevant master fund and the asset manager is responsible for making all relevant disclosures and the statement. The marketing rules require firms to produce the same disclosures and statement as those required where sustainability-related terms are used in the name of a product. The same feeder fund requirement applies in the marketing rules. 

Firms will be able to commence making the use of labels with accompanying disclosures from the end of July next year and the naming and marketing rules come into force from early December next year.

Information:

New information requirements are designed to ensure that consumers can access information to help them to navigate the sustainable investment landscape and understand the key features of sustainable investment products. The central pillar is that firms should provide easily accessible product-level information to consumers ("consumer-facing disclosures"). There are additional more detailed information requirements aimed at institutional investors and those consumers seeking more information ("pre-contractual disclosures", “ongoing product-level disclosures” and “entity-level disclosures”).

The consumer-facing disclosures require a clear and concise disclosure for both products with a label and those without a label which use sustainability-related terms. The disclosure must not exceed two pages in length, must be placed in a prominent place on any relevant digital medium via which the product is offered (with hard copies available on request), and must include: the product's label or statement clarifying that it does not have a label; investment policy and strategy; relevant metrics; details of where other relevant information (that is sustainability and non-sustainability related information); and a further requirement specific to the “Sustainability Mixed Goals” labelled products only.

The “entity-level disclosures” require firms to disclose their governance, strategy, risk management, metrics and targets in relation to managing sustainability-related risks and opportunities, with firms with over £5 billion AUM being required to make these disclosures annually in a “sustainability entity report”. 

Distributors:

There are new and targeted rules applicable to the distributors of investment products designed to ensure that the product information, including the labels, reaches consumers. These requirements recognise that distributors play a significant role in the communication of information to consumers. Accordingly, distributors must: communicate labels and provide access to "customer-facing disclosures"; keep labels and “customer-facing disclosures” up to date; include a notice on any overseas products stating that these are not covered by the UK's sustainable investment labelling and disclosure requirements; and ensure the notice is displayed prominently (taking into account the channel of communication used) together with a link to the FCA's webpage which provides more information to consumers.

In big picture terms, this new framework is designed to achieve a number of benefits which include: enabling the provision of better information to consumers, helping consumers to make better informed decisions, enhancing the protection of consumers, ensuring sustainability-related terms are used appropriately, improving transparency and integrity in the markets, improving information flows through the investment chain, improving trust in the markets, reducing the risk of harm from greenwashing and enabling a more sustainable future. It should be expected that the FCA will monitor market intelligence and challenge firms accordingly. 

The current scope of the regime extends to UK funds (AUTs, OEICs, ACSs, ICVCs, AIFMs, feeder funds and distributors). This has been expressed as a “starting point” and it is anticipated that the FCA will consult on the wider application of these rules to portfolio management products and services in early 2024. Watch this space….