The FCA is currently developing the UK SDR, which will introduce a set of sustainability-related product labels, product- level and entity-level disclosures, and additional rules regarding sustainable investing for the UK. 
 

The UK SDR builds on both the FCA’s implementation of the Task Force on Climate‑related Financial Disclosures (TCFD), which came into effect in April 2022, and the FCA’s “Dear Chair Letter” from July 2021 that addressed greenwashing concerns, warned firms against exaggerating the sustainable characteristics of their products and services, and provided guidance on how to mitigate these issues.
 

The FCA’s goal for the UK SDR is “to provide greater transparency, consistency, and in turn, trust, in the market for sustainable investment products”. The proposed sustainability labels are intended to clearly distinguish between products that can be considered sustainable and achieve a label, and those that are not, and would neither be permitted to use a label nor use the term “sustainable” (or similar terms) in their fund names or marketing materials. 
 

For those products in scope for a label, the UK SDR distinguishes between different types of investment products based on their sustainability‑related objectives and features. Together with the associated disclosures, which apply at both a product and entity level, the labels are designed to give consumers the information they need to make informed choices with regards to which products meet their needs and sustainability preferences. 

Entities in the scope of the UK SDR include:

• Firms carrying out portfolio management
• UK Undertakings for Collective Investment in Transferable Securities (UCITS) management companies
• Investment companies with variable capital (ICVC) that are UCITS schemes without separate management companies
• Full-scope UK Alternative Investment Fund Managers (AIFM)
• Small authorised UK AIFMs
   

Products and activities in scope include:

• Authorised funds (excluding feeder funds and funds in the process of winding up or termination) 
• Unauthorised Alternative Investment Funds (AIFs), including investment trusts 
• Portfolio management services (if 90% or more of the value of all constituent products qualify for the same sustainability label)

The FCA is, presently, targeting the fourth quarter of 2023 to publish its Policy Statement, which will set out the final rules and guidance on the UK SDR. Once published, requirements are expected to be rolled out incrementally (see timeline). 

Proposed timeline of the UK SDR 

The current consultation paper for the UK SDR features three key elements: 

• Introduction of sustainable investment labels
• Related entity- and product-level disclosures 
• Additional rules related to greenwashing, marketing and distribution

Sustainable investment labels

Three sustainable investment labels are proposed to help consumers navigate the investment product landscape and enhance consumer trust. The current definitions of the labels are:

• Sustainable Focus: Products which maintain 70% of the profile of assets by investing to meet a credible standard of environmental and/or social sustainability; or to align with a specified environmental and/or social sustainability theme.
• Sustainable Improvers: Products with an objective to deliver measurable improvements in the sustainability profile of assets over time. These products are invested in assets that, are selected for their potential to become more environmentally and/or socially sustainable over time, including in response to the stewardship influence of the firm.
  
• Sustainable Impact: Products with an explicit objective to achieve pre-defined, positive, measurable real-world outcome(s). These products are invested in assets that provide solutions to environmental or social problems, often in underserved markets or to address observed market failures.

These sustainable investment labels are accompanied by implementation guidance, which includes overarching principles and associated key considerations setting out the expectations for in-scope firms, and the expected sustainability‑related features of each sustainable investment label.

Entity-level and product-level disclosures 

The UK SDR proposes several levels of sustainability-related disclosures:

• Consumer facing disclosures are designed to help retail consumers understand the key sustainability-related features of a product.
  
• Product-level disclosures are intended to provide further information to assist a wider audience, including institutional investors and consumers. These include:
    o Pre contractual disclosures, such as a fund prospectus, that disclose the sustainability-related features of investment products.
    o Sustainability product reports that disclose key sustainability-related performance indicators and metrics, building on the TCFD product report. 
• Detailed entity-level disclosures require firms to disclose how they are managing sustainability-related risks and opportunities.

Additional rules and requirements

The UK SDR is also likely to include several additional rules and requirements related to sustainable investing, such as: 

• A general “anti greenwashing” rule to reiterate existing rules and clarify that sustainability-related claims must be clear, fair and not misleading.
• Naming and marketing rules to restrict the use of certain sustainability-related terms in product names and marketing materials for products that qualify to use a sustainable investment label.
• Requirements for distributors to ensure that product-level information (including the sustainable investment) is made available to consumers.

Currently, the proposed UK SDR and the EU SFDR, share some features, including mandating product- and entity-level disclosures, and pre-contractual and ongoing disclosures. However, there are key differences between the two regulatory regimes, both in approach and scope. Notably, the UK SDR does not include the concept of double materiality or cross-product asset-level definitions, such as “sustainable investment”, which exist in the EU SFDR. The UK SDR does, however, explicitly introduce labels, and, by extension, eliminates the use of sustainability-related terms for non-labelled funds. The UK SDR also introduces two levels of disclosure (consumer vs. institutional investors). 

The consultation period for the proposal closed on 25 January 2023 and the FCA is now assessing and incorporating feedback. The industry understands that the FCA intends to publish the final rules (Policy Statement) in the fourth quarter of 2023. The proposed immediate and staggered effective dates noted in the consultation paper are expected to be adjusted accordingly to align with the date of the Policy Statement.

The FCA is also looking at the following key areas of development: 

• Scope: The FCA is developing proposals to expand the scope of investment products captured under the UK SDR.
• Overseas products: The FCA intends to follow the UK SDR initiative with a separate consultation on how the proposals within the UK SDR might apply to overseas products.
• Financial advisers: The FCA is exploring how to introduce rules for financial advisers aimed at confirming whether they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. This will also be preceded by a separate consultation.
• Listed issuers: The FCA intends to consult on adapting its UK TCFD-aligned disclosure rules for listed issuers to reference the International Sustainability Standards Board (ISSB) standards which are considered by the UK government as the “backbone” of the UK SDR’s corporate reporting element. 
• Disclosure of transition plans: The FCA intends to build on its UK TCFD-aligned disclosure rules, which reference the TCFD’s guidance on transition plans. 
• UK Green Taxonomy related disclosure requirements: The FCA will consider how to update product-level disclosure requirements to include relevant disclosures once the UK Green Taxonomy is developed, with a consultation expected in autumn 2023. 
• Sustainability related metrics: The FCA intends to build on its product-level disclosure requirements, adding a baseline of core sustainability-related metrics for firms to disclose for all products as further ISSB sustainability disclosure standards are developed. 
• Entity level disclosures: The FCA also intends to build on its entity-level disclosure requirements, adding more specificity and granularity to disclosure requirements for different sustainability topics in line with the development of future ISSB standards.