The FCA has now published its long-awaited Consultation Paper on Sustainable Disclosure Requirements (SDR) and Investment Labels (CP22/20).  The paper outlines several proposals with the overall aim of tackling greenwashing and building consumer confidence in the market for sustainable investment products.

Core to the proposals are three new investment labels which fund providers can choose to apply to products, subject to meeting the specified requirements.  The proposed labels are:

1. Sustainable Focus – Investing in assets that are environmentally and/or socially sustainable
2. Sustainable Improvers – Investing in assets that, while not currently environmentally or socially sustainable, 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
3. Sustainable Impact – Invested in assets that provide solutions to environmental or social problems, often in underserved markets or to address observed market failures

Other proposals within the consultation paper include:

• Consumer Facing product level disclosures. These will help consumers to understand the key sustainable features of a product.
• More detailed disclosures at product and entity level. These are aimed at a broader range of stakeholders, including institutional investors.
• Naming and Marketing rules – These include a general anti-greenwashing rule and ensure that sustainability related claims are clear, fair, and not misleading. These rules will also apply some restrictions around the naming of products which do not use a label.
• Requirements for distributors. Distributors including financial advisers and platforms will be expected to provide information on labels and make available the consumer facing product level disclosures.  As to assessing suitability, the FCA will explore how to introduce rules for financial advisers in due course.

A Policy Statement containing the finalised rules is expected by June 2023.  Investment firms will be granted 12 months from the policy statement to implement the labelling and produce the required product disclosures.  This means an expected implementation deadline of 30^th June 2024.  The Policy Statement will also include specific requirements for portfolio management services wishing to apply a sustainable label.

The market for sustainable investment products has expanded rapidly over recent years.  These proposed measures will help consumers and their advisers understand how products are positioned and better facilitate like-for-like comparisons between different investments.  The measures will ensure more consistent use of terminology, as well as tackling misleading claims and greenwashing leading to improved consumer confidence.

Overall, the rules are expected to be welcomed by the financial services industry.   However, there is still much to understand around how the rules will be implemented, what changes providers may need to make to existing positions and importantly how the advice journey will need to adapt to identify client needs and match them to a product with an appropriate label.

Tenet Compliance Services welcomes the clarification from the FCA on the investment labels and its intent to crack down on greenwashing.  Most importantly, standardising the information provided to clients will enable more informed decisions on their investments.

We are here to support advisers with understanding the new SDR and Investment Label requirements and provide guidance on how different investment providers have implemented the new rules.  ESG Compass will be updated as the market develops to become a valuable central source of information covering guidance on the the Sustainable Disclosure Requirements, provider obligations, suggested adviser processes and comprehensive comparative data around how investment firms have applied the proposed new labels.

We are very much looking forward to supporting you on this sustainable investment journey.