On 2 December 2024, the FCA released updated examples of good and poor practices in the pre-contractual disclosures required for labelled funds under the Sustainability Disclosure Requirements (SDR) and investment labels regime.

Examples of Good and Poor Practices

A key concept of the SDR regime is that to qualify for a label, specific criteria must be met and supported by disclosures. Last month, the FCA published illustrative examples for the Sustainability Focus and Sustainability Improver labels to demonstrate how applicants can meet the pre-contractual disclosure requirements.

These examples have now been expanded to include the Sustainability Impact and Sustainability Mixed Goals labels. Based on the FCA's experience with applications to date, these non-exhaustive examples are intended to help applicants in preparing their documentation effectively. Some examples of good disclosure practices from the document include:

• Sustainability Focus: The examples emphasise the need for a clear link between the sustainability objective and the criteria used for asset selection, particularly ensuring that these criteria are well-defined. For instance, in one example the FCA refers to specific UN Sustainable Development Goals (SDGs) rather than the SDGs in general and in another it describes the use of a proprietary scoring model, explaining why that model is robust and evidence based. In both examples, it explicitly ties the approaches back to the sustainability objective in the disclosures.
• Sustainability Improver: The examples highlight the importance of the inclusion of short, medium, and long-term targets that align with the fund's long-term sustainability objectives. They also note that detailed information can be provided via a linked document, and where certain details are missing, a clear explanation should be given as to why and how the investment manager intends to deal with this e.g. by expressing a commitment to ongoing monitoring.
• Sustainability Impact: The examples stress that a clear theory of change is required, structured to show the challenge, the solution, and how the investment manager plans to address this (i.e. “the What”, “the Who”, “the Asset impact” and “the Investment Manager impact” in Table 3.2). This includes ensuring that Key Performance Indicators (KPIs) adequately record and measure the impact of both the investment manager’s investment activities and the fund’s assets.
• Sustainability Mixed Goals: The examples indicate the importance of a cohesive approach to the sustainability objective and strategy of a Mixed Goals fund. This means ensuring that the sustainability objective is clear, specific, and measurable, even if it qualifies under multiple sustainability labels. Disclosures should be comprehensive, covering all aspects of the fund’s sustainability objectives and how they are being met, with detailed explanations of the criteria used for asset selection and the supporting evidence.

Poor Disclosure Practices

The FCA also identified several poor practices that do not meet SDR requirements, including:

• Disclosing an asset selection process that does not align with the product’s specified sustainability objectives.
• Failing to explain and provide evidence for the appropriateness of scoring or thresholds used to define sustainability.
• Not disclosing, where applicable, that a manager has an override for asset selection.

For products seeking a Sustainability Improvers label, additional poor practices include:

• Failing to disclose the types of evidence relied upon to ensure assets can meet robust, evidence-based standards.
• Omitting short and medium-term targets or presenting targets that are inconsistent with the long-term sustainability goals.

If you would like further information or advice on the SDR regime, please do get in touch with any member of our Regulated Funds team.