The new sustainability disclosure requirements – Q&A
The new sustainability disclosure requirements – Q&A
The Financial Conduct Authority has recently introduced an anti-greenwashing rule alongside new Sustainability Disclosure Requirements (SDR) in the UK, which include an investment labelling regime. Together, they aim to prevent greenwashing and end the lack of transparency that has affected some financial products.
Why is new regulation needed?
Financial products with descriptions such as responsible, ethical, or sustainable have soared in popularity and number in recent years, but with that rise, there has been ambiguity:
- Is this really green or good for society?
- Who is verifying the claims?
- Is the evidence available to view?
- Is it in a format I can understand and compare?
Some investment opportunities have lacked clarity and consistency on their environmental and social offers. This discredits the whole industry and undermines trust. The new regulations aim to ensure investors and consumers can access and have confidence in the information they need to make decisions in line with their sustainability preferences and financial goals.
When is it happening?
Rules to prevent greenwashing in marketing came into action on 31st May 2024, and from July 31st you’ll start seeing labels on investment funds that have a specific environmental or social goal. From 2 December 2024, if a fund doesn’t include a label but is making sustainability claims, you’ll have access to clear and simple information explaining how it’s invested and why it doesn’t have a label.1 This is a fairly short implementation period requiring swift action across the sector. The rules are extensive and complex, after all, sustainability is so subjective and nuanced.
The top three changes to be aware of are:
- Financial products can only be described as ‘Sustainable’ if they have met specific requirements. There will be four new sustainability labels, detailed in the next section.
- UK financial firms must meet diverse disclosure obligations under the new rules, including providing simplified sustainability information that is easy for retail investors to understand.
- Websites and marketing materials must avoid overblown claims. This of course has always been the case, but the new guidelines reiterate this with particular reference to greenwashing, and bring imagery and branding into the equation to ensure they are not misleading. For example, it’s no longer okay to have a rainforest scene on a web page where only one of many portfolios listed is sustainable.
What are the four sustainability investment labels?
The four labels are not designed to offer a hierarchy, but to indicate different sustainability goals.
- Sustainability Focus invest mainly in assets that focus on sustainability for people or the planet, such as supporting production of energy from solar, wind or hydrogen.
- Sustainability Improvers invest mainly in assets that have the potential to become more sustainable over time, such as investing in companies that are on a credible path to net zero by 2050.2
- Sustainability Impact invest mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or planet, such as social housing.
- Sustainability Mixed Goals invest mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet, such as a mix of examples from the above three labels.3
Funds that have labels will need to give you clear and simple information, including:
- What the sustainability goal of the fund is
- The approach to achieving it
- Annual updates on progress towards the goal4
In addition:
- The product must have at least 70% of its assets invested in accordance with the sustainability objective, with reference to a robust, evidence-based standard and any other assets must not conflict with the sustainability objective.5
What does it mean for me?
This is ultimately a good thing for those who look to invest more responsibly. After the initial scramble to adapt, it should help improve confidence in the sector, with the goal of a much more transparent approach to make it easier to understand your options.
In the short term however, there will be some changes. Some funds currently labelled as ‘Sustainable’ may not retain that specific protected description, even if they would qualify. This is because the process to prove sustainability is still largely unknown. It will certainly necessitate significant investments in systems, processes, and personnel to ensure compliance and avoid potential regulatory penalties. Therefore, some organisations may simply decide not to pursue it or need more time to implement the necessary changes.
However, even if a fund describes itself as green or low-carbon, you’ll still have access to clear and simple information about what the fund is investing in and why it doesn’t have a label.
It is possible that initial delays in labelling will result in a smaller investment universe for environmental and socially conscious investors. A reduction in options makes it harder to build balanced portfolios. This is likely to correct over time.
How will it impact the investment landscape?
As Holden & Partners and the industry at large are still working through the measures that have been, and are due to be, put in place, we don’t yet have all the answers.
However, what we do know is that anything that aims to eradicate greenwashing within our industry can only be a force for good. We envisage that at the initial stages of implementation, there is likely to be an element of confusion within the industry, which will ultimately lead to a reduction in the amount and range of sustainability labelled options to invest in. This will lead to existing, socially conscious portfolios being adapted to ensure they can meet the new regulations whilst being able to stand as a viable, risk-adjusted, balanced, investment proposition.
Over the short-term, whilst the industry transitions to the new labelling regime, it is possible that we could see a reduction in the overall amount of capital invested in green projects, and with climate change becoming ever more urgent, this is a potential concern. Having said this, over the longer-term, we hope that foundations are being set, which will improve trust in sustainable financial products, leading to greater investment in a better future.
Will it change how Holden & Partners works?
We welcome the new rules, but it is fair to say that applying them is very complex and there is a lot of extra work going on behind the scenes!
We are currently in the research phase. This involves gaining a deep understanding of the regulations, analysing how similar (but not identical) rules have played out so far in Europe, and liaising with industry colleagues.
It seems likely that our process will then proceed as follows:
- Research & education – we are engaging with discussions across the industry and seeking expert viewpoints, establishing best practice.
- Engage with clients – we are planning webinars and communications to explain the new guidelines and to encourage our clients to participate in discussions about what comes next.
- Update our process – to add any steps required to our already robust screening process for choosing responsible funds.
- Consider labelling – decide what approach we would like to pursue.
In terms of our in-house operations, we will continue our ongoing progress of greening our office business decisions which centres on our mission to focus on people and planet.
Holden & Partners has always offered both traditional and ethical funds and we’re proud of our track record. We will continue to provide varied options in line with our clients’ ethics and preferences, and we’ll keep you updated as the SDR process unfolds over coming months.
1 Sustainable investment labels and anti-greenwashing | FCA
2 P.106, ps23-16.pdf (fca.org.uk)
3 P.98-111, ps23-16.pdf (fca.org.uk)
4 Sustainable investment labels and anti-greenwashing | FCA
5 P.100, ps23-16.pdf (fca.org.uk)