Introduction

On December 2, 2024, the United Kingdom (UK) reached a number of further environmental, social and governance (ESG) milestones.

Almost a year ago, the Financial Conduct Authority (FCA) published its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels. The new rules and guidance – set out in FCA Policy Statement 23/16 (PS23/16) – included an anti-greenwashing rule, four investment labels, and new rules and guidance for firms marketing investment funds on the basis of their sustainability characteristics.

The anti-greenwashing rule, which applies to all FCA-authorised firms and is located in ESG 4.3.1R of the FCA Handbook, took effect after a short delay on May 31, 2024, whereas the timing of the other measures were staggered.

The investment labels, as well as the rules on disclosure, naming and marketing, apply to “UK asset managers” (summarised in Table 15 of PS23/16) and cover consumer-facing disclosures, pre-contractual disclosures, ongoing product-level disclosures, and entity-level disclosures. The new rules focus on products offered by UK funds to retail investors in the UK, although pre-contractual, ongoing product-level and entity-level disclosures apply to products offered to both retail and institutional investors in the UK.

From July 31, 2024, a UK asset manager could voluntarily adopt one of the four new sustainability labels – Sustainability Focus, Sustainability Improvers, Sustainability Impact or Sustainability Mixed Goals – for a UK fund, although they have been under no obligation to do so. Additional rules for distributors – regarding labels, consumer-facing disclosures and notices on overseas funds for firms using labels – also came into force on this date.

December 2 milestones

December 2, 2024 was the date of two further key milestones. The rules for distributors regarding notices on overseas funds came into effect, as did – at least originally (more on that below) – the naming and marketing rules.

The purpose of the naming and marketing rules is to help consumers differentiate between products claiming to have sustainability objectives and using a label, and those that have sustainability characteristics without using or qualifying for a label.

According to these rules, a product that is marketed or sold based on sustainability-related terms but is without a label must have sustainability characteristics and its name must accurately reflect those characteristics, but the terms “sustainable,” “sustainability,” “impact,” and any variation of those terms cannot be used. As per the anti-greenwashing rule and the FCA guidance that accompanies it (FG24/3), firms should also consider their product name as a whole and how a consumer may interpret it.

In terms of marketing, there are three key conditions. The first is that the anti-greenwashing rule and other financial promotions rules are met, and that firms consider in particular the FCA guidance in FG24/3. The second and third conditions concern the firm making relevant disclosures and a statement. Firms using sustainability-related terms in product names and marketing for products that are without a label must produce the same types of disclosures as for labelled products. This covers consumer-facing, pre-contractual, ongoing product-level and entity level disclosures. Firms using sustainability-related terms in product names and marketing must also publish a statement in a prominent place on the relevant digital medium where the product is offered, explaining why the product does not have a label.

Disclosures

In terms of disclosures, the key point to note is that the rules are in place to help consumers compare products more effectively and efficiently, potentially leading to greater competition between similar products.

Whilst the FCA has not created a template for the disclosures, it has specified the minimum information required and that firms must review and update their disclosures at least every 12 months. There is quite a useful table in Annex II of the PS23/16 setting out the FCA’s final rules, which provides further information on both customer-facing disclosures and product-level disclosures. There is also ongoing work taking place on an industry template that readers may be familiar with.

Temporary flexibility

The original December 2, 2024 date for compliance turned out not to be quite as hard a deadline as many firms had originally thought. In a move widely welcomed by the UK asset management industry, on September 9, 2024, the FCA published a new webpage offering firms the opportunity to delay their compliance with the naming and marketing rules until 5pm on April 2, 2025.

In order to take advantage of what the FCA termed as ‘temporary flexibility’, firms could apply to the regulator to delay compliance with the new rules, as long as they had submitted a completed application for approval of amended disclosures – in line with rule 5.3.2 of the ESG sourcebook – for a UK fund by 5pm on October 1, 2024. This applied only to those using one or more of the terms ‘sustainable’, ‘sustainability’ or ‘impact’ – or a variation of those terms – in the name of a fund, who were intending either to begin using a label or to change the name of that fund. Firms should expect April 2, 2025 to be a hard deadline for compliance.

More on the naming and marketing rules can be found in episode 11 of our Let’s talk asset management podcast series, UK SDR naming and marketing rules.

Distributors

As mentioned above, December 2, 2024 was also a key date for distributors. Distributors were already subject to the anti-greenwashing rule and were required to communicate the existence of a label and provide access to consumer-facing disclosures (for both labelled and unlabelled funds) to retail investors. However, from December 2, 2024, distributors now also have to provide notice on overseas products clarifying that they are not subject to the UK SDR.

Next steps

For those firms that are not taking advantage of the FCA’s temporary flexibility, the first set of ongoing disclosures for financial products will need to be published next year. PS23/16 also set out rules and guidance regarding sustainable entity reports and these reporting requirements are tiered based on the asset size under management (AUM):

  • Firms with over £50 billion in AUM must publish their first reports by December 2, 2025.
  • Firms with AUM between £5 billion and £50 billion have a later deadline of December 2, 2026 for their initial reports.

Overseas funds and Portfolio managers

The regulator said it will continue working with HM Treasury in relation to overseas funds offered by FCA-regulated firms. In perhaps the most surprising change, except for the anti-greenwashing rule, UK portfolio management was excluded from the rules in PS23/16. The FCA instead issued a separate consultation on portfolio management in April 2024 (CP24/8) and has now stated that it intends to publish a policy statement on implementation in Q2 2025.

Conclusion

Given that SDR is a flagship reform for the FCA, we can expect to hear more from the regulator in 2025 and firms should continue working towards the various deadlines and not expect any further instances of ‘temporary flexibility’.

In this article, we have touched on two key components of SDR: labelling and distribution, and disclosures and reporting. However, there are other areas that are equally important, including governance, risk identification, policies and procedures, and enforcement. More on that to follow in the New Year.