FCA in UK proposes new rules to tackle greenwashing (SFDR equivalent)
New proposal on sustainability disclosure for financial market participants by FCA 20/22
25/10/2022 — The Financial Conduct Authority (FCA) is proposing a package of new measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. This is the second consultation process.
What is SDR and how is it differ from EU SFDR?
It is not largely different from the SFDR and EU taxonomy, however UK advisory group is pointing out the problems of the European version on how unclearly defined the article 6, 8 and 9 funds.
The EU SFDR introduced the following three disclosure categories of products — these have become a de facto classification and labelling system despite the EU SFDR Regulatory Technical Standards:
- Article 6 — funds that do not integrate sustainability into the investment process
- Article 8 — funds that promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices
- Article 9 — funds that have sustainable investment as their objective
In Annex 1, the FCA sets out a method for considering how to treat a product that discloses under one of the above categories under the EU SFDR for its proposed regime as follows:
- Article 6: will not need an SDR sustainable label.
- Article 8 or Article 9: that meet the FCA cross-cutting criteria and category-specific criteria may be eligible for one of the 3 SDR sustainable labels.
The focus of the UK proposal is on consumer protection and disclosure. If there are certain funds in certain baskets, the FMPs have to disclose “why” it is in there and not necessarily how sustainable they are like what EU regulation is trying to do.
Disclosure categories
The categories are the following three.
- sustainable focus (for products investing in assets that are environmentally or socially sustainable)
- sustainable improvers (for products investment in assets to improve the environmental or social sustainability over time, including in response to the stewardship influence of the firm); and
- sustainable impact (for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact). The labels are all underpinned by objective qualifying criteria and assess products on the sustainability objective they are seeking to achieve. The criteria are also designed to provide flexibility to accommodate different sustainability objectives for continued evolution and innovation in the market within clear guardrails.
The disclosure channels are the following four;
- Detailed disclosures, targeted at a wider audience (e.g. institutional investors or retail investors) that want to know more including the following:
- Pre-contractual disclosures (e.g. in the fund prospectus), covering the sustainability-related features of investment products
- Ongoing sustainability-related performance information including key sustainability- related performance indicators and metrics, in a sustainability product report
- A sustainability entity report covering how firms are managing sustainability-related risk and opportunities
The consultation is open until January, and the regulation will come into effect at the end of June 2023. This will make financial service companies to carefully create, label and market their products according to the regulation. The original regulation can be found here.
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