FCA Introduces New Anti-Greenwashing and Sustainability Disclosure Regulations for Portfolio Managers

The Financial Conduct Authority (FCA), the regulator for financial services firms and markets in the UK, has announced a consultation on a new proposal to extend its Sustainability Disclosure Requirements (SDR) to portfolio managers. This initiative aims to help investors evaluate the sustainability attributes of investment products and to mitigate the risk of greenwashing – the practice of providing misleading information about the environmental benefits of a product or service.

This proposal follows the FCA's introduction of SDR requirements for asset managers in November 2023. These initial requirements included an anti-greenwashing rule to ensure that sustainability-related product claims are accurate and verifiable. Additionally, the rules set guidelines for the naming and marketing of funds based on their sustainability characteristics and established a new labelling regime for sustainable investment products. By extending these rules to portfolio managers, the FCA aims to further enhance transparency and trust in the sustainability claims of investment products across the financial sector.

While the initial SDR was developed primarily for retail investors, the new proposal would extend the requirements to firms that manage groups of investments for consumers. This includes wealth management services for individuals and model portfolios for retail investors.

The FCA noted that firms offering portfolio management services to professional clients will not be subject to the naming and marketing requirements. This extension aims to ensure that retail investors receive clear and accurate information about the sustainability attributes of their investment products, enhancing their ability to make informed decisions.

This regulation aims to prevent companies from engaging in greenwashing – a deceptive practice where unsubstantiated or exaggerated claims about sustainability are made to attract investors.

Moreover, the SDR also introduced strict naming and marketing rules for investment products. According to these regulations, sustainability-related terms can only be utilised in product names and marketing materials if a designated label is applied. In cases where no label is used, the product’s name must accurately portray its characteristics without resorting to terms such as “sustainable”, “sustainability”, or “impact”.

These measures are crucial in ensuring that investors are provided with accurate and reliable information about the sustainability aspects of financial products. By promoting transparency and accountability, the SDR aims to enhance investor confidence and contribute to the growth of sustainable investing practices in the UK financial market.

The labelling regime introduced four distinct labels: Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals. These labels are designed to help consumers differentiate between the sustainability objectives and investment approaches of various products. Each label comes with specific criteria that must be met for its use, providing clarity and transparency for investors seeking sustainable investment options.

Under the new proposal, portfolio managers will be subject to the new naming and marketing rules starting on December 2, 2024, aligning with the timeline for asset managers. From this date, portfolio managers will also be able to start using the new sustainability labels.

Firms with assets under management (AUM) exceeding £50 billion will be required to provide product-level disclosures under the SDR beginning in December 2025. Those with AUM greater than £5 billion will follow, starting in December 2026. This phased approach aims to ensure a smooth transition and comprehensive compliance across different scales of portfolio management firms.