UK: FCA update on SDR and investment labels consultation

SDR Policy Statement delayed

On 29 March 2023, the FCA published an update regarding its Consultation Paper: Sustainability Disclosure Requirements (SDR) and investment labels (CP22/20) which closed on 25 January 2023.  CP22/20 originally stated that the FCA intended for the final rules and Policy Statement in relation to the SDR to be published by the end of H1 2023 with the proposed “anti-greenwashing rule” coming into effect from the date of publication, and further rules for UK-based funds and portfolio management coming into effect approximately one year later by 30 June 2024. 

Further to the FCA’s update, the H1 2023 date has now been pushed back until Q3 2023 and the proposed effective dates shall also be adjusted to reflect this delay. The FCA suggests that the delay is due to the significant response it has received to CP22/20 with around 240 written responses. The FCA states that the responses showed “broad support” for the proposed regime and outcomes that the FCA is seeking to achieve, and adds that it wanted to take into account any “practical challenges” that firms might have in implementing the rules.

FCA Chief Executive Nikhil Rathi stated in a speech on 29 March 2023 that the proposed ESG labelling regime for investment products would build trust in the growing sustainable investment category and confirmed that the final rules would be published “later this year”.

UK Treasury Sub-Committee Inquiry into greenwashing and SDR

As reported in our earlier Engage article last month, the Treasury Sub-Committee on Financial Services Regulations opened an Inquiry into greenwashing and the SDR following the publication of CP22/20.  Following the Inquiry hearing on 22 February 2023, the Chair of the Inquiry, Harriet Baldwin, corresponded with the FCA in a letter dated 9 March 2023 asking about the potential monetary and other costs to consumers of the SDR proposals.  The letter also asks questions about international divergence/convergence and the potential risks to consumers and the funds industry were the FCA requirements to become too onerous for US or EU based funds to meet.  Harriet Baldwin requested that the FCA respond to this letter by 23 March 2023 and so far the response has not yet been published.  Could the considerations raised by the Treasury Sub-Committee also explain the delay in the FCA’s final Policy Statement in relation to the SDR?  Given the Inquiry has raised a number of issues including whether a cost benefit analysis was properly carried out when considering the SDR proposals, the FCA could require extra time to reflect on the issues raised by the Inquiry and consider the consultation responses.

Future Policy Statement: possible clarifications and softening in approach?

The FCA’s update states that it will carefully consider the feedback it has received to CP22/20 which will include considering the approach to the marketing restrictions, refining some of the specific criteria for the labels and clarifying how different products, asset classes and strategies can qualify for a label, including multi-asset and blended strategies.

The FCA states that it will also clarify matters including that it will not require independent verification of product categorisation to qualify for a label and that primary and secondary channels for achieving sustainability outcomes will not be prescribed.

The FCA also confirms that there will be a place for all in-scope products within the overall package of measures, agreeing that it is important that consumers can navigate to those products that meet their needs and preferences. This includes products that may not qualify for a sustainability label, but nevertheless have some sustainability-related characteristics.

The FCA cite “international coherence” as a key consideration, and the need for “robust standards for the UK to remain at the global forefront of sustainable investment. In line with the Future Regulatory Framework (FRF) review and the Edinburgh Reforms, the FCA is of the view that a strengthened regulatory framework for these products will increase opportunities and competition in the market and help foster growth and the demand and supply of products that better suit consumers’ needs and preferences.

Background: What does FCA CP22/20 cover?

To recap, CP22/20 sought views on the FCA’s proposed rules for the SDR to help consumers navigate an increasingly complex sustainable investment product landscape, protect them from greenwashing and rebuild trust.  Further details on CP22/20 are set out in our earlier Engage article of 25 October 2022. 

Next steps

We will continue to track developments in relation to the Inquiry and the SDR and labelling proposals and will report on any significant changes as soon as we hear further.  Please get in touch with our specialist Sustainable Finance and Investment Practice who would be happy to provide further advice and guidance in relation to the proposed SDR regime or wider ESG proposals in the UK/EU.

Authored by Rita Hunter, Julia Cripps, Melanie Johnson, and Emily Julier.