Proposed UK Sustainable Disclosure Requirements
The Financial Conduct Authority (FCA) has issued a Discussion Paper (DP21/4) (the “DP”) seeking industry participants’ views on the proposed new Sustainability Disclosure Requirements (SDR) and an accompanying sustainability labelling system. The SDR are a key building block of the Government’s ‘Greening Finance: A Roadmap to Sustainable Investing Roadmap’ (the “Roadmap”), published in October 2021.
The SDR intend to provide an industry-wide standard for key sustainability-related information, e.g. how the investment firm is managing sustainability risks, opportunities and impacts and about the sustainability characteristics of investment products. The SDR will be calibrated to a consumer and professional investor audience to reflect the different characteristics and information needs of both groups.
The DP sets out two tiers of proposed disclosures which build upon the FCA’s climate-related disclosure requirements, aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), but widen the disclosure scope (beyond climate and financial risks and opportunities) to also cover: (i) sustainability matters more broadly; and (ii) the impact firms and investment products are having on the environment and society.
The DP is open for comment until 7 January 2022 and the input received will inform policy proposals to be issued for a consultation paper in Q2 of 2022.
Who is required to comply with the disclosure obligations?
The SDR introduce disclosure requirements and a sustainable investment labelling system which will apply to listed issuers, asset managers, certain FCA regulated asset owners, and the investment products that they offer.1 The application of the disclosure requirements to overseas funds marketing into the UK is currently unclear but is under active consideration by the FCA and HM Treasury.
What are the proposed disclosure requirements?
The DP introduces a system of disclosures and sustainable investment product labels, as follows: (1) standardised consumer-facing disclosures containing key product-level information; (2) detailed disclosures at product and entity level on sustainability risks, opportunities and impacts, aimed at professional investors; and (3) product categorisation and labels.
The proposed consumer-facing product disclosures will likely be provided in standardised format describing the product’s key sustainability attributes in an easily comprehensible format improving comparability and accountability for sustainability claims made. The consumer-facing disclosures are likely to constitute a subset of the more detailed disclosures.
The proposed sophisticated investor-facing disclosures (aimed at institutional investors and wider stakeholders) are designed to provide more detailed and nuanced disclosures to support sophisticated investors in their investment decision-making process.
These disclosures will be provided at both entity and product level, provide more granular information than the consumer-facing disclosures, additional information as relevant, and also support and complement the product categorisation and labelling regime.
Disclosure Criteria Table - please click here to view
What are the proposed UK product labels?
The proposed standardised product classification and labelling system would help consumers understand the sustainability characteristics of different products and navigate the products on offer. The FCA will develop and implement the labels, building on existing work under other domestic and international initiatives by industry and official sector initiatives.
The proposals envisage three ‘Sustainable’ categories (‘Transitioning’, ‘Aligned’ and ‘Impact’), each of which would have varying degrees of commitment to specific sustainability themes or characteristics alongside financial objectives. The differentiator between ‘Aligned’ and ‘Transitioning’ products is the proportion of assets considered sustainable (based on the UK Taxonomy or other criteria). ‘Aligned’ products would have a higher allocation to sustainable activities (above a specified threshold), whilst ‘Transitioning’ products would, at the time of assessment, have a low allocation, but as they are investing in assets that are transitioning towards sustainability could still be assigned the ‘Sustainable’ label. The FCA is also considering the role of other differentiators such as the tracking of low carbon benchmarks.
Further, the FCA is interested in understanding whether there are circumstances in which labels might not be particularly meaningful, suitable or feasible, e.g. where portfolio management services are provided on the basis of segregated mandates or where products are not targeted at retail investors.
How do the proposed product labels correspond to the product categories under the EU Sustainable Finance Disclosure Regulation (SFDR)?
The FCA recognises that many UK investment managers and other FCA-authorised firms may be required to comply with the SFDR as a result of their existing activities. Such firms may have already categorised their products in accordance with SFDR requirements. The table at the link below sets out the indicative mapping of the SDR product labels against the existing SFDR product categories.
What are the firm-level requirements?
The DP proposes minimum criteria, set at the relevant entity level, which must be satisfied by the issuer, investment manager or other relevant entity, for a financial product to be eligible to be considered ‘Sustainable’ or ‘Responsible’. The entity level criteria applies to the entity responsible for delivering the product and/or managing the investments, e.g. the investment manager. The purpose for including entity-level criteria is to ensure that the framework for the management of the product also meets a minimum threshold of sustainability-related criteria.
Such criteria (please see the table at the link below) will likely include requirements regarding systems and controls, governance, ESG integration and stewardship. The FCA may apply a higher threshold entity level standard for ‘Sustainable’ products, relative to ‘Responsible’ products.
Entity Level Requirements Table - please click here to view
Terminology
The FCA recognises that one of the key challenges faced by investors is the interchangeable use of key sustainable finance and ethical terms and the lack of agreed definitions. The FCA considers that using common terminology and standardised definitions could help to combat potential greenwashing and enhance trust. Accordingly, the DP is seeking feedback on terms commonly regarded as high-level features of impact investing: (i) intentionality; (ii) impact measurement; and (iii) additionality.
Feedback
The FCA is seeking feedback on any quantifiable, measurable thresholds and criteria that could be applied to evidence suitability for obtaining each of the ‘Responsible’ and ‘Sustainable’ labels, and additionally on the potential challenges and trade-offs in this approach. The FCA also recognises that many UK firms operate on a global basis and is accordingly seeking feedback on any practical or other types of challenge that firms might face in producing sustainability-related disclosures in line with the TCFD’s framework (e.g. jurisdiction-specific sustainability-related considerations). The disclosure requirements will interact with the climate related disclosure requirements the FCA consulted on earlier in 2021. Our related alerts can be viewed below:
The Roadmap to Sustainable Investing—UK to Be the First Net Zero-Aligned Financial Center
EU Guidance Clarifies SFDR Extraterritorial Application and Scope of Article 8
The FCA Publishes Guidance on ESG Disclosures and Greenwashing
UK Proposes New Climate-related Disclosure Rules for Standard Listed Companies
UK Proposes New Climate-related Disclosure Rules for Asset Managers
The contribution of Hallie Tucker is gratefully acknowledged.
1The DP is seeking views on the types of firms and products that should be in the scope of the SDR’s proposed requirements for labels and disclosures.
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