The FCA has published a quarterly consultation, part of which focuses on certain amendments to the Environmental, Social and Governance (ESG) sourcebook to clarify some of the existing SDR rules and guidance. Comments on the proposed changes are requested by 13 January 2025.

Chapter 2 of the consultation outlines the proposed changes, some helpful clarifications in respect of which include:

• The anti-greenwashing rule (AGR): The FCA is proposing to remove the Glossary term link from the word ‘communicates’ in ESG 4.3.1R(1)(a). By previously linking ‘communicates’ to the Glossary definition, the consultation explains that this incorrectly limits the scope of paragraph (a) to financial promotions. The consultation states that by removing the link, the word ‘communicates’ will have its broader, natural meaning, reflecting the policy intention for the AGR to be a general rule requiring all authorised firms to ensure that the information they communicate to their clients about the sustainability characteristics of their products is fair, clear and not misleading.
• KPIs and other metrics: ESG 5.3.3R(6) requires that pre-contractual disclosures detail the key performance indicators (KPIs) that the manager uses under ESG 4.2.4R(3) ‘and/or’ other metrics a retail client may reasonably find useful in understanding the manager’s investment policy and strategy for the relevant product. The consultation explains that the policy intention behind this is that:
  1. a manager who is using a sustainability label, must disclose the KPIs that it will use under ESG 4.2.4R(3), as well as any other metrics that a retail client may find useful; or
  2. a manager who is not using a sustainability label (and who will therefore not be using KPIs under ESG 4.2.4R(3)), must disclose any metrics that a retail client may find useful. 

The FCA highlights that the drafting in ESG 5.3.3R(6) risks being interpreted to mean that a manager using a sustainability label can choose to disclose either the KPIs it is using or other metrics. The FCA is therefore proposing to amend the wording ‘and/or’ to make clear that, where a manager is using a sustainability label, it must disclose the KPIs it is using. Additionally, all managers, whether using a sustainability label or not, must include details of any metrics that a retail client may reasonably find useful in understanding the manager’s investment policy or strategy for the product.

• Product-level reporting: Managers falling within the scope of SDR are required to produce a product-level sustainability report annually covering a 12-month period. The rules currently require the first report to be produced within 12 months after a manager first starts to use a label or one of the relevant SDR terms. This means, to cover the requisite 12-month reporting period and to comply with the deadline for producing the first report, managers may need to cover a period of time during which they were not using a label or relevant term. The consultation clarifies that this was not the intention. Therefore, the FCA is proposing to amend ESG 5.4.3R(1) so that for the first product-level report, managers have 16 months from the start of their use of a label or the relevant term in which to produce that report. This provides firms an additional 4 months, after which reporting should continue on an annual basis.

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.