The regulator is inviting views on potential criteria for classifying and labelling investment products, and on further entity- and product-level sustainability-related disclosures.

By David Berman, Paul A. Davies, Nicola Higgs, Anne Mainwaring, and Charlotte Collins

On 3 November 2021, the FCA published a Discussion Paper (DP21/4) on UK Sustainability Disclosure Requirements (SDR) and product labels. This paper was anticipated following the government’s recently published Roadmap to Sustainable Investing, which set out proposed timeframes for developments in this area.


The Roadmap explained that the SDR will set out disclosure requirements for corporates, asset managers, and asset owners, modelled on the global baseline sustainability reporting standards to be developed by the International Financial Reporting Standards Foundation’s International Sustainability Standards Board. The SDR will also include disclosure requirements relating to the forthcoming UK Green Taxonomy (UK Taxonomy).

The FCA notes that, although it has already consulted on introducing climate-related disclosures for asset managers and asset owners based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), SDR would go further and require disclosure in relation to sustainability matters more broadly. It would also include the concept of “double materiality”, requiring firms to disclose both financial materiality (i.e., how ESG issues impact the value of a fund’s assets) and the impact that the firm and its products are having on the environment and on society. The FCA is considering how it could streamline requirements to avoid duplication and ease the regulatory burden on firms.

In relation to consumer-facing disclosures, the FCA is considering how these can be clear and comprehensible. It plans to carry out consumer testing to understand what types of information consumers would find decision-useful. One option it is considering is whether to mandate the use of templates or an ESG factsheet.

In terms of detailed disclosures, the FCA explains that at the product level these could include, for example, information on methodologies used to calculate metrics, information on data sources, alignment with the UK Taxonomy, further supporting narrative, and information about benchmarking and performance. At entity level, the FCA intends to build upon its proposed TCFD-aligned disclosure requirements for asset managers and asset owners.

The FCA will consider further the scope of the SDR requirements. It notes that its proposed TCFD-aligned disclosure rules recognise that many UK firms operate on a global basis, and will allow firms the flexibility to make disclosures at the level of consolidation that they find most useful for clients and consumers. This acknowledges that many firms are already making TCFD-compliant disclosures voluntarily at group level. One important consideration for firms will be whether the FCA ultimately expects the SDR entity-level disclosures to be applied at the same level of consolidation as TCFD disclosures, or whether firms will have the option to limit this to UK entities.

Sustainable product labels

The Discussion Paper also maps out the FCA’s current thinking in relation to a UK sustainable product labelling system, which will require certain investment products to display a label reflecting their sustainability characteristics, complementing the entity- and product-level SDR disclosures. Both of these initiatives aim to promote transparency through high-quality sustainability disclosures, promote trust in investment products, and protect consumers and investors from so-called greenwashing.

Overarching considerations in DP21/4 include how such labels and disclosures should be structured to meet the needs of all end users. The FCA is contemplating a three-tier system that would include:

  • Product label: A standardised product classification and labelling system
  • Disclosure layer 1 (aimed at consumers): Product disclosures containing key product-level information
  • Disclosure layer 2 (aimed at institutional investors and other stakeholders): Detailed disclosures at product and entity level, providing more granular information

The FCA also seeks feedback on the scope of the requirements, including the types of firms and products that should be captured. In particular, the FCA is keen to understand whether there are circumstances in which the labels might not be particularly meaningful, suitable or feasible. The FCA is also liaising with HM Treasury to consider how overseas funds marketing into the UK should be treated. A clear policy approach on this point would be welcomed, as the EU SFDR is somewhat vague on the issue.

The FCA identifies the interchangeable use of key sustainable finance and ethical terms and the lack of agreed definitions as significant issues in this area. The regulator wants to understand how to leverage existing initiatives to create a labelling and classification system, and how the system should be designed. Some key design principles that the FCA identifies include ensuring that labels are objective, covering both investment objectives and actual allocation of investments, and ensuring there is flexibility to keep up with market developments.

The FCA suggests a system that would cover the full range of investment products available to retail consumers, including those that do not make sustainability claims. The FCA outlines one potential approach as follows:

The FCA also provisionally suggests how these categories might map across to the EU SFDR. In terms of the criteria underpinning these categories, the FCA sets out a potential approach to classification. The regulator is keen to ensure that it strikes a balance between ensuring the criteria are quantifiable and measurable, and allowing a principles-based approach. The FCA is interested to hear whether, alongside product-level criteria, it should also set entry-level criteria that would apply to the firm responsible for the product. This would help ensure that a firm’s internal arrangements in terms of processes, resources, and decisions applied in the management of the product also meet a minimum threshold of sustainability-related criteria.

Next steps

The FCA requests comments by 7 January 2022. It plans to use feedback from the Discussion Paper to formulate its policy proposals, which are due for consultation in Q2 2022. Therefore, new rules are unlikely to take effect before the start of 2023, and firms should consider this alongside the EU SFDR disclosure timeline. Firms should note that the FCA has indicated that it may well monitor their engagement with the policy developments, not least as this might point to a firm’s attitude towards ESG-related matters.

Moreover, the FCA has published its revised ESG Strategy, setting out the regulator’s priorities and planned work programme. It has also helpfully outlined the upcoming milestones for 2022 against its key workstreams in an infographic, which serves as a useful reference tool for firms and others tracking these developments. The FCA has based its work around five core themes: transparency, trust, tools, transition, and team. The latter two are new additions since the FCA’s previous strategy. Transition focuses on the FCA supporting a market-led transition to net zero, and team focuses on ensuring that the FCA has the right organisational structures, resources, and capabilities in place to appropriately integrate net zero and ESG considerations across the FCA.