On 28 February 2025, the Financial Conduct Authority (FCA) issued Handbook Notice 127.

Given that Handbook Notices are fairly routine in the sense that they refer to Policy Statements that have already been published together or contain miscellaneous amendments to the Handbook they can easily be overlooked.  But on this occasion, Handbook Notice 127 contained some interesting changes that the FCA has made to its ESG sourcebook and in this article we briefly cover these.

The changes are set out in the Sustainability Labelling and Disclosure Of Sustainability-Related Financial Information (Amendment) Instrument 2025 which the FCA Board approved on 27 February 2025. This instrument amends the ESG sourcebook and updates certain guidance provisions in other related sourcebooks to clarify certain existing rules. The key amendments are as follows.

Anti-greenwashing rule

The FCA has sought to clarify the scope of the ‘the anti-greenwashing rule’, as under the amendments the FCA has removed the hyperlink to the Glossary term for the word ‘communicates’ in ESG 4.3.1R(1)(a) and ESG 4.3.1R(1)(b). This amendment ensures that the word ‘communicates’ will have its broader, natural meaning which will give proper effect to the rule as consulted on in CP22/20, as opposed to linking it specifically to financial promotions. Additionally, there has been confirmation that ESG 4.3.1R(1)(a) and ESG 4.3.1R(1) (b) are not intended to be read cumulatively. The FCA confirmed, paragraph ESG 4.3.1R(1) (a) will apply to communications that are not financial promotions and paragraph ESG 4.3.1R(2)(b) will apply to communications that are financial promotions.

The question of the scope of application of the anti-greenwashing rule was a key question and point of interpretation around implementation of the rule, with many focusing in on this defined term. For those whose implementation focused on the ‘look through’ definition of ‘communicates’  this amendment may amount to a relatively significant expansion of the application of the rule in practice. As ever it us important to place the rule in context and there remain limitations on its application – to communications in relation to a product or service – but even there, the terms are not defined and again should be given their natural meaning. In practice, firms are well advised to take an expansive interpretation of the scope of the rule in keeping with the FCA’s policy intent.

Distributors

Under the amendments, the FCA has amended the word ‘or’ to ‘and’ in ESG 4.1.19R(2)(a) to clarify that where distributors are using the terms set out in ESG 4.3.2R(2) in either the name of a recognised scheme or a financial promotion relating to the scheme, they need to comply with both ESG 4.1.19R(2)(a) ‘and’ ESG 4.1.19R(2)(b). This means that distributors that distribute recognised schemes to retail clients must in relation to the relevant digital medium for the distributor’s business:

  1. Display the notice at ESG 4.1.19R(1) in a prominent place on the specific webpage or page on a mobile application or other digital medium at which the recognised scheme is offered; and
  2. Include a hyperlink to the relevant webpage of the FCA website which sets out for retail clients further information in relation to the sustainability labelling and disclosure requirements under ESG 4 and ESG 5.

Feeder Funds

The FCA have made amendments to ESG 4.3.7R(3) to add the words ‘where it is not using a sustainability label’ so that it clarifies that a manager that is undertaking sustainability in-scope business in relation to a sustainability product that is a feeder fund, where it intends to use the terms in ESG 4.3.2R(2) in the product’s name, must ensure that the manager complies with the requirements of ESG 4.3.5R(3) where they are not using a sustainability label.

Alignment with the SDR and TCFD reporting timeline

The TCFD rules require reports to be published by 30 June each year, and the FCA amendments to the SDR will require the first report to be published 16 months after a label is first used or the naming and marketing rules for sustainability terms set out in ESG 4.3.2R(2) apply. Managers can choose to start using labels at any time after 31 July 2024 and must comply with the FCA naming and marketing rules by 2 April 2025 and the reports must cover a 12-month period. The FCA are therefore not able to specify a deadline for the first year of SDR reporting as it will depend on when the label or terms are first used. However, under ESG 5.4.3R(3) firms will be able to choose to amend their publication date for subsequent SDR product-level reports if they would prefer to align with the TCFD, or any other reporting deadline. Firms must simply ensure there is no period of time which is not covered e.g., by issuing an interim report if necessary.

The changes are effective from 28 February 2025.