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Sustainability Disclosure Requirements (SDR): Explained

By Alison Mungall
29th January 2023

The broad scope in terms such as ‘ESG’ and ‘sustainable’ can accommodate a diverse range of investment products. This has led to the risk of greenwashing and an investment market that is currently difficult for consumers to navigate.

Demand for sustainable investment products is rapidly growing and by introducing the Sustainable Disclosure Requirements (SDR), the Financial Conduct Authority aim to build transparency and trust to help consumers navigate the market.

This article will outline what’s included in the proposals, an overview of the investment labels, a deep dive into consumer-facing and detailed disclosures, implementation timelines and our key takeaways from the proposals.

Worth noting that the FCA’s consultation on the proposals closed in January 2023 and finalised rules are expected to be published in mid-2023.


What’s included in the SDR proposals?

  1. Sustainable investment labels  Labels underpinned by robust criteria to help consumers navigate the investment product landscape and enhance consumer trust.
  2. Consumer‑facing disclosures:  short and  simple disclosures for retail investors
  3. Detailed entity and product disclosures targeted at institutional investors and consumers seeking more information
  4. Naming and marketing rules restrict the use of certain sustainability-related terms in product names and marketing materials if the product hasn’t got a sustainable investment label.
  5. Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers
  6.  A general ‘anti‑greenwashing’ rule applied to all regulated firms which reiterate existing rules to clarify that sustainability-related claims must be clear, fair and not misleading.


The proposals for sustainable investment labels

The proposed labels are underpinned by robust qualification criteria to enhance consumer trust. The labels aim to help consumers distinguish financial products that contribute to sustainable outcomes. Products without a sustainability objective but integrating ESG (to consider risks, opportunities and impacts material to financial performance) would not qualify for a label.

The three labels depend on “intentionality” or the aims of the product. They distinguish between different types of sustainable products, according to the objective and the primary contribution mechanism by which investors achieve positive sustainability outcomes, such as stewardship or allocation of capital.

Sustainable focus’: Assets that are already sustainable (renewable energy, BREAM Excellent buildings)

‘Sustainable improvers’: Aim is to improve environmental and/or social sustainability over time. Supports transition to a sustainable future

‘Sustainable impact’: Investment in solutions to environmental or social problems, to achieve positive, real-world impact

There is no hierarchy between the labels and they are mutually exclusive. A Fund Manager must choose which label  (if any) is most appropriate for their fund. Products that are not labelled must follow naming and marketing rules and make disclosures.


Deep dive: Proposals for consumer-facing disclosures regardless of whether it has a label

The bare minimum level of disclosure should contain product information on the product‘s key attributes, including its sustainability-related features:

  • Whether the product has a label (for products that DO qualify for a label, the relevant disclosure should be no more than ‘one mouse click away’ from where the label is presented. For example, a hyperlink next to or underneath the label.)
  • The sustainability objective
  • The investment approach
  • Performance against the objective

The FCA stipulate that disclosures should be simple, avoid jargon and be easily accessible by a retail audience. The disclosure should be made available in a prominent place on the relevant digital medium (e.g. main product webpage). No template for product disclosure is proposed, but a short, standalone document – no more than 2 A4 pages are advised.


Deep dive: Proposals for detailed disclosures

Picture 1

Overview of how SDR disclosures build from existing requirements

These are more granular disclosures targeted at institutional investors or retail investors seeking more information, they build on existing disclosures such as TCFD and will be developed in line with ISSB proposals.

Precontract disclosures: The sustainability objective, the investment policy and strategy will be included in the prospectus. The pre-contract proposals apply to all products that adopt sustainability-related features integral to investment policy, whether or not they have labels.

Sustainability product report: This will build on the TCFD product report Includes sustainability performance indicators and  metrics, and initially are only required  if the product has a label

Entity-level disclosures: Build on the TCFD entity report and cover how sustainability risks and opportunities are managed in line with TCFD pillars. Larger firms (asset managers with above £50 billion in AUM) will be required to make their first disclosures by 30 June 2025, with smaller firms, excluding those with under £5 billion in AUM, required to make their first disclosures one year later.


Other provisions

It’s important to note that not all funds need a label – it should be for a small set of funds that are going above and beyond. The FCA has set out rules to guide firms in how they should be labelling their products and requirements for all FCA-regulated firms.

Naming and marketing materials

For products that do not qualify for an SDR label, firms marketing ESG products to investors cannot use sustainability-related terms in their product names and marketing, such as ‘ESG’, ‘climate’, ‘green’ or ‘sustainable’.

For products that qualify for Focus and Improver labels, firms cannot use the term ‘impact’ in the naming and marketing of these products to retail investors. Sustainability-related terms can be used to disclose factual information pre-contract disclosures. These rules will apply provisionally from 30 June 2024.

Anti-greenwashing rule

All FCA-regulated firms will have to ensure that the naming and marketing of financial products are clear, fair and not misleading. FCA proposes that this rule comes into effect on 30 June 2023.

Requirements for distributors

Distributors of products to retail investors must ensure that product‑level information is made available to retail investors from 30 June 2024.


Proposed implementation timeline

Picture 12

Key takeaways of the SDR proposals

The final rules have yet to be published but ahead of this, we have set out some of the key takeaways from proposals and implications for firms and investors seeking information in the meantime.

  1. Sustainable investment labels are underpinned by rigorous eligibility criteria to tackle greenwashing
  2. Labels apply to funds that go beyond best practice in ESG integration by putting ESG objectives alongside investment objectives
  3. SDR labels do not align with SFDR disclosures exactly but the FCA considers they most closely align with Article 9
  4. The Sustainability ‘Improvers’ label has received a lot of support from the industry
  5. SDR framework builds on existing TCFD disclosures and will be integrated with ISSB’s global disclosure framework
  6. SDR will start with UK firms. There will be a gap in consistency and comparability with overseas funds marketing into the UK until they are brought into the scheme


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