FCA sustainable disclosure: Aligned or add-on?

UK regulator has proposed two levels of disclosure, for consumers and institutional investors


Natasha Turner

UK regulator the Financial Conduct Authority (FCA) is proposing new disclosure requirements for sustainable funds, but hopes to align these with other frameworks that firms will already be using.

In its consultation paper published this week, Sustainability Disclosure Requirements (SDR) and investment labels, the FCA proposed two levels of disclosure requirements for funds: one for consumers that outline the product’s key sustainability-related features, and more detailed disclosures for institutional investors.

“We want our regime to be compatible with other initiatives internationally as far as possible, while remaining appropriate for the UK market,” it said.

“We recognise that many UK firms have been building capabilities to comply with SFDR in respect of their EU business and will be preparing to comply with the SEC’s proposals.”

Although broadly welcomed by the investment industry, some commentators are worried this may add to the ever-mounting requirements for sustainability disclosure.

“For those already struggling with the SFDR or the TCFD [Taskforce for Climate-related Financial Disclosures], the promise of yet more disclosure requirements may not be so welcome,” said regtech company Cube CEO Ben Richmond.

“It’s a double-edged sword – a noble and essential goal, but compliance teams will need sufficient, resource, time and technology to manage.”

Although the requirements are due to be made available at the same time as the FCA’s new fund labelling requirements (provisionally 30 June 2024), the regulator said these are meant as a starting point, but that it would be building them out in line with the ISSB as that develops.

The ISSB decided last week companies will be required to disclosure on Scope 3 greenhouse gas emissions as well as 1 and 2. It is set to come into force early in 2023, but companies will likely have more time to work on disclosing Scope 3.

Within SDR, the FCA said disclosure for consumers must be made in a prominent location, ideally in a separate document, particularly if the product has obtained one of the regulator’s new sustainability labels (see ESG Clarity’s article on the FCA’s three new sustainability labels here).

It should include a product’s sustainability goal and approach, any unexpected investments that consumers may find surprising in a sustainable fund, it’s sustainability metrics and signposting to any other disclosure documents, alongside the basic information and product label.

The regulator said it won’t be creating a template for this at this stage, but “encourages” the industry to adopt one.

Regardless of whether or not a fund is labelled sustainable, the FCA wants to see disclosure in line with its rules on anti-greenwashing marketing.

Disclosure for professional investors

For its more detailed disclosure requirements, the FCA has said firms can disclose through pre-contractual disclosures and sustainability reports such as TCFD reports, if they have sustainable labels or any sustainable objectives.

In their pre-contractual disclosures, such as in their fund prospectuses, firms have to disclose a fund’s sustainability objective, including how this impacts returns and environmental or social outcomes, as well as laying out its investment policy and strategy and how each investable asset meets its sustainability objectives. Firms also have to set out their stewardship policy.

The FCA also suggests creating separate sustainability reports that build on TCFD reporting for those funds with sustainable investment labels. These must display the sustainable investment label, and state the product’s sustainability objective as well as progress towards meeting that objective, and provide info on the firm’s investment policy and strategy, KPIs and stewardship activities.

Entity-level disclosure

The consultation said: “In addition to information on the sustainability-related features of investment products, clients and consumers are increasingly interested in how firms offering these products are managing sustainability risks and opportunities.”

Therefore, the FCA has also proposed all in-scope asset managers be required to produce a sustainability entity report.

Larger firms (asset managers with above £50bn in AUM) will be required to make their first disclosures by 30 June 2025, with smaller firms, excluding those with under £5bn in AUM, required to make their first disclosures one year later.

These can also include TCFD disclosures and link to those reports, as long as any linking or cross-referencing is clearly signposted, and can use the four pillars of TCFD reporting.

The FCA said: “Consistent with our climate-related disclosure rules, the entity-level disclosures would be made in respect of how the firm takes sustainability-related matters into account in managing investments on behalf of clients and consumers.”

“These proposed FCA rules involve a significant step-up in the level of detail required in sustainability-related disclosures, however they remain relatively non-prescriptive, for example around what counts as a sustainability-aligned investment,” commented Benjamin Maconick, managing associate in Linklaters’ financial regulation team.

“This feeds into a wider issue that is common to sustainability disclosures generally, as even in the EU where the EU’s Green Taxonomy is in effect, it does not seek to define every possible approach to sustainability, and firms complying with regimes such as the EU SFDR still have to come up with their own frameworks, for example to assess social sustainable investments.”

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