SDR Final Rules Announced

The FCA has published the long awaited SDR (Sustainability Disclosure Requirements) final rules on 28th November 2023. See below for our summary of these rules. Note that this does not constitute legal or regulatory advice.

Importantly, note that there is something for almost everyone here, even if you do not opt in to using the labels. And we’re here to help.

Key Observations

• UK Scope. Currently, the rules only apply to UK firms and their UK-domiciled products marketed in the UK. Overseas funds and firms are not in scope.

  • Entity-level disclosure rules apply to UK firms, capturing their approach to managing sustainability risks and opportunities in respect of UK and overseas funds managed from the UK.

  • Anti-greenwashing rules apply to all FCA authorised firms who make sustainability-related claims about products and services.

  • The extension of SDR to overseas funds is supported by the FCA and will be consulted on by HMT.

• SDR’s bar is higher than SFDR. The use of labels requires a fund to have a sustainable objective as part of its investment objective. This means most Article 8 funds “will need to level up” to use these labels. In addition, SDR sets a minimum threshold of 70% alignment to all labels.

• This is mostly retail focused. For funds marketed exclusively to institutional investors, much of the new rules does not apply but you must still comply with the anti-greenwashing rules. In addition, even if not adopting the labels, you will still need to make entity level disclosures (if >£5bn), and detailed product disclosures if you use sustainability terms in product names or marketing. Our expectation therefore is that if you have an Article 8 fund, but do not meet the criteria/elect to use the SDR labels, you’ll still need to make the product disclosures.

• Anti-Greenwashing Rules vs. Naming and Marketing Rules. Anti-greenwashing rules apply to all FCA authorised firms who make sustainability claims and require those claims to be fair, clear and not misleading. Naming and Marketing Rules only apply when marketing to retail investors.  

• Timing. SDR will be implemented over 3 years, with different elements of the rules coming into effect at different times. First up is anti-greenwashing in May 2024.

Background

The FCA released the initial consultation in Oct 2022, primarily focused on product labels with the goal of protecting retail investors (“consumers”) from greenwashing. The final rules include some notable developments from the initial consultation, including the addition of a 4th label and relaxing the naming and marketing rules to allow the promotion of non-labelled products with ESG characteristics.

Sustainability Labels

Name	Requirements
Sustainability Focus	Sustainability objective must be consistent with an aim to invest in assets that are environmentally and/or socially sustainable, determined using a robust, evidence-based standard that is an absolute measure of sustainability. Independent assessment to confirm the standard is fit for purpose may be obtained via internal process or third parties but must be independent from the investment process.
Sustainability Improvers	Sustainability objective must be consistent with an aim to invest in assets that have the potential to improve environmental and/or social sustainability over time – determined by their potential to meet a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability. Identify the time period by which the product and/or its assets are expected to meet the standard, including interim targets. KPIs can demonstrate improvement of the product as a whole, and/or the improvement of individual assets within the product. It is up to firms to decide how to treat products or assets that have met their target for improvement.
Sustainability Impact	The sustainability objective must be consistent with an aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome. Specify a theory of change, setting out how you expect investment activities to achieve a positive impact. If the investment strategy to pursue the sustainability objective is likely to result in any material impact on the financial return, this will need to be disclosed.
Sustainability Mixed Goals	Applies if a mix of sustainability objectives (and approaches) is present in a product. Disclose the proportion of assets invested in accordance with each of the other relevant labels.

Summary of Rules 

Rule	Summary	Applicable to	Timing
Anti Greenwashing Rule	Reinforces that sustainability-related claims must be fair, clear and not misleading. Applies to all communications about financial products which refer to environmental and/or social (i.e. sustainability) characteristics of those products. This is of particular relevance if you have an article 8 fund, even if you do not decide to adopt SDR labels. There is no specific list of terms for this rule. Note there is additional consultation underway on supporting guidance for this rule, which closes 26th Jan 2024.	All FCA authorised firms who make sustainability-related claims about products and services	31 May 2024
Product Labels	Final rules set out 4 product labels which firms can choose to adopt (if criteria are met). Labels are for products seeking to achieve positive sustainability outcomes only. Products using strategies such as ESG integration or basic ESG tilts alone do not qualify. General qualifying criteria must be met to use an investment label relating to sustainability objective, investment policy and strategy, KPIs, resources and governance, and stewardship. Labelled products must have a sustainability objective as part of their investment objectives. This means most Article 8 funds will need to “level up” to be eligible for these labels. Article 9 funds are most likely eligible. 70% minimum threshold has been applied to all labels. The sustainability objective should represent the aim of the overall product, but the product may invest in other assets for liquidity and risk management purposes as long as 70% of the gross value of the product’s assets are aligned with the sustainability objective. Exceptions in place for ramp-up phase. Products should not include any assets in conflict with the objective. Specify a measurable sustainability objective and determine the KPIs you will use to measure performance towards that objective. KPIs are not prescribed. Ensure appropriate resources and governance to support the sustainability objective. Identify and disclose the stewardship strategy needed to support the sustainability objective. Identify and disclose if pursuing the positive outcome could result in negative E/S outcomes (think of this as the equivalence to DNSH). Labels represent different types of investment objective and investment approach, not intended to be hierarchical. Fund managers retain responsibility for compliance with labelling rules.	UK Asset Managers	31 July 2024
Naming and Marketing Rules	For investment products to ensure the use of sustainability-related terms is accurate. Initial proposal was to outright restrict the use of any sustainability-related terms in product names and marketing unless adopting product labels. This has been softened. Sustainability-related terms can only be used in product names and marketing if: they use a label – provided that, where the ‘sustainability focus’, ‘sustainability improvers’ or ‘sustainability mixed goals’ labels are used, the word ‘impact’ is not used in the product’s name, or they do not use a label but comply with the rules below. Naming: The product must have sustainability characteristics and the product’s name must accurately reflect those characteristics, but the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms must not be used. Produce the same types of disclosures as required for a labelled product. Firms must also produce and prominently publish a statement to clarify that the product does not have a label and the reasons why. Marketing: Produce the same disclosures and statement as those required when sustainability-related terms are used in the name of a product.	UK Asset Managers; Products marketed to retail investors	Firms using product labels:31 July 2024 Firms using sustainability terms without product labels:2 December 2024
Disclosures: Consumer-Facing Information	To provide consumers (i.e. retail investors) with better, more accessible information to help them understand key sustainability features of a product. Standalone document, presented in prominent place (i.e. alongside other product documents). Specific list of information to be included, but not a prescribed template. Must not exceed 2 pages. Required for labelled products, and those using sustainability-related terms in naming and marketing. Review / update at least every 12 months.	UK Asset Managers: Products marketed to retail investors only	Firms using product labels: 31 July 2024 Firms using sustainability terms without product labels:2 December 2024
Detailed Disclosures: Pre-Contractual	Products using a label: info is broadly associated with the qualifying criteria for the label Products not using a label: include information relating to the investment policy and strategy, and any relevant metrics.	Institutional and Retail Investors Products using a label or sustainability terms	From the first date the label is used or by 2 December 2024 for products using the terms without a label
Detailed Disclosures: Ongoing Product-Level	Annual disclosures required 12 months after any label or terms are used.	Institutional and Retail Investors Products using a label or sustainability terms	Product labels: From 31 July 2025 (public) From 2 December 2025 (on demand) Firms using sustainability terms without product labels: 12 months from when the terms are first used.
Detailed Disclosures: Entity-level	Disclosures made annually in sustainability entity report, building from TCFD entity report. Cross-referencing to other disclosures is permitted. Consistent with TCFD’s (and ISSB’s) 4 pillars firms are required to disclose their governance, strategy, risk management, and metrics and targets in relation to managing sustainability-related risks and opportunities. Where firms use labels or sustainability-related terms in their product names and marketing, they must also include details on their resources, governance and organisational arrangements in relation to those products.	Institutional and retail investors All UK asset managers >£5bn AUM (regardless of whether you use a label or sustainability terms).	From 31 July 2024 (where firms are using labels) 2 December 2024 (notice on overseas funds)
Requirements for Distributors	To ensure product-level information is made available to consumers: Distributors must communicate the labels and provide access to consumer-facing disclosures to retail investors, either on a relevant digital medium for the product or using the channel they would ordinarily use to communicate information. They must keep the labels and consumer-facing disclosures up to date with any changes that the firm makes to a label or the disclosures. Distributors must also include a notice on overseas products (ie, recognised schemes – including Exchange Traded Funds) to clarify that they are not subject to the UK sustainable investment labelling and disclosure requirements. The notice must be (i) in a prominent place on the relevant digital medium, along with a link to the FCA webpage setting out more information for consumers, or (ii) communicated via the channel the distributor would ordinarily use.	Distributors of investment products to retail investors in the UK	From 31 July 2024 (where firms are using labels) 2 December 2024 (notice on overseas funds)

What Next

1. All UK authorised firms should prepare for the anti-greenwashing rule if you make claims about the sustainability characteristics of your products to ensure sustainability claims are fair, clear and not misleading. (Read consultation on additional guidance).

2. UK asset managers should decide whether to label UK domiciled products that aim to achieve positive sustainability outcomes, if they meet the qualifying criteria.

3. Familiarise yourself with the requirements and timeframes (set out above).

4. All UK asset managers to prepare for entity-level disclosures.

5. Get in touch if you want to discuss further!