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FCA’s SDRs

Introduction

The Financial Conduct Authority (FCA)’s Sustainability Disclosure Requirements (SDRs) are a set of rules that aim to improve the quality and consistency of sustainability disclosures made by UK-authorised investment firms. The SDRs will apply to all investment funds, ETFs, and other investment products that are marketed as sustainable. The requirements include:

  • Product-level disclosures: Firms must disclose their sustainability-related policies and how their investment products align with those policies.
  • Entity-level disclosures: Firms must disclose their overall sustainability performance across all of their investments.
  • Investment labels: Firms will be able to apply four different investment labels to their products, depending on how they meet the SDRs.

 

The SDRs are designed to help investors make informed decisions about their investments and to reduce greenwashing, which is the practice of making misleading claims about the sustainability of an investment product.

Regulated investment firms should consider the following steps:

Understand and prepare for anti-greenwashing rule:

Claims about sustainability characteristics must be fair, clear and notmisleading, by 31 May 2024.

Consider labels:

Consider whether to label your investment products, which label, and whether your products meet the qualifying criteria.
Labels, with accompanying disclosures, can be used from 31 July 2024.

Consumer-facing disclosures,

which must include:

  • Either the product’s sustainability objective and label, or the statement to clarify that the product does not have a label
  • The investment policy and strategy (including what the product will and will not invest in)
  • Relevant metrics.

Entity-level disclosures

which must include:

  • TCFD (/ISSB) report, comprising governance, strategy, risk management, metrics and targets by 2 December 2025 (> £50bn) and by 2 December 2026 (> £5bn) and published annually.

Qualifying criteria:

  • Sustainability objective: The product must have a clear sustainability objective.
  • Investment policy and strategy: At least 70% of the product’s assets must be invested in accordance with its sustainability objective, with reference to a robust evidence-based standard that is an absolute measure of environmental or social sustainability.
  • Key Performance Indicators (KPIs): Identify KPIs to measure progress against the sustainability objective.
  • Resources and governance: Ensure appropriate resources, governance, and organisational arrangements to support the delivery of the sustainability objective.
  • Stewardship: Identify and disclose the stewardship strategy needed to support the delivery of the sustainability objective.

Naming and marketing:

  • If not using the labels, the product’s name must accurately reflect its characteristics
  • The terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of those terms are reserved only for the labels.

The four sustainability labels:

Improver

The Sustainability Improver label requires:

  1. A sustainability objective to invest in assets with potential for environmental/social sustainability improvement over time, meeting a rigorous, evidence-based sustainability standard.
  2. A defined timeline with short and medium-term targets for the product/assets to meet this standard, backed by robust evidence.
  3. A stewardship strategy supporting the objective.
  4. Relevant KPIs reflecting the product's sustainability objectives, showing progress of the product or individual assets towards the objective.

Focus

The Sustainability Focus label requires:

  1. An objective to invest in assets proven to be environmentally/socially sustainable by a rigorous, evidence-based standard, based on an absolute measure of sustainability.
  2. At least 70% of the product's assets must meet this standard, and other assets must not be in conflict with the sustainability objective.
  3. Thematic investments are allowed if they comply with the above criteria.

Impact

The Sustainability Impact label requires::

  1. A sustainability objective aligned with a specific, measurable positive environmental/social impact.
  2. A theory of change detailing how investments and assets will create this impact.
  3. A method to measure and show the positive impact of investments and activities.
  4. An escalation plan for assets not meeting the sustainability objective.

Focus

The Sustainability Focus label requires:

  1. An objective to invest in assets proven to be environmentally/socially sustainable by a rigorous, evidence-based standard, based on an absolute measure of sustainability.
  2. At least 70% of the product's assets must meet this standard, and other assets must not be in conflict with the sustainability objective.
  3. Thematic investments are allowed if they comply with the above criteria.

Mixed goals

The Sustainability Mixed Goals label will need to meet the requirements under the specific criteria for each of the other labels the fund is invested across.

For all labels, an independent assessment, internal or external, is required to confirm the standard's suitability, independent of the manager's investment process.

Product-level disclosures must be published annually.

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