Fiddich Review Centre
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CP22/20: Further leaves unfurl on the tree of the UK ESG regime | Dechert LLP

The disclosure regime

Consumer-facing disclosures

Scope: The consumer facing disclosure regime applies to all in-scope firms marketing in-scope products to retail investors, regardless of whether they qualify for and choose to use a label, but excludes firms providing portfolio management services.

Location: These disclosures should be made available in a prominent place in a digital medium, for instance, the firm’s main product webpage, and will need to be in a standalone document, alongside other documents that present other key investor information such as the Packaged Retail Investment and Insurance-Based Products (“PRIIPs”) Key Information Document (“KID”).

Format: Whilst there is some prescription governing the format and content of the disclosures, the FCA is not introducing a template but encourages firms to develop a market-led one.

Content: The following must be disclosed:

  • Basic information. Include the firm’s name, product name, International Securities Identification Number (ISIN), or any other unique identifier, and date.
  • Product label. This must be displayed towards the beginning of the disclosure and include a brief description of what the label means.
  • Sustainability goal. The product’s sustainability objective, signposted as ‘sustainability goal’, highlighting if there is an impact or expected impact on the financial return (e.g. expected implications for the financial risk profile).
  • Sustainability approach. A summary of key elements of the product’s investment strategy to pursue the objective (e.g. investible universe, screening, themes).
  • Unexpected investments. A summary of the types of holdings that the firm would reasonably expect consumers of the product to find ‘surprising’ (i.e. inconsistent with the sustainability objective), considering factors such as the sector in which the product invests or trade-offs within the sustainability profile of a company.
  • Sustainability metrics. Relevant metrics/KPIs linked to achieving the sustainability objective and, where relevant, any other metrics that would help consumers to further understand the approach that the firm has taken, including an explanation of how the metrics should be interpreted.
  • Signposting to other disclosures. A cross reference/hyperlink to further information in the detailed product-level disclosures (pre-contractual and ongoing performance disclosures), entity-level disclosures, and relevant documents that set out non-sustainability-related information for the product (e.g. costs and charges).

Frequency: The disclosures must be made and reviewed annually.

Pre-contractual disclosures

Scope: The pre-contractual disclosures apply to all in-scope firms using a sustainable investment label, excluding firms providing portfolio management services, and to firms not using a label but where sustainability-related features are integral to the investment policy and strategy (excluding firms providing portfolio management services).

The pre-contractual disclosures apply to all in-scope products, excluding portfolio management services. Firms providing portfolio management services will not be required to produce pre-contractual disclosures, but must instead provide access to the pre-contractual disclosures for the underlying in-scope product.

Location: These disclosures must be made in the relevant fund prospectus, investor information document as required under FUND 3.2 of the FCA Handbook or sustainability product report.

Format: There is no prescribed format.

Content: The disclosures must cover the product’s compliance with the following Principles under the labelling regime:

  • Principle 1 – sustainability objective.
  • Principle 2 – investment policy and strategy.
  • Principle 5 – stewardship.

Frequency: The first pre-contractual disclosures must be made available at the same time as the label and consumer-facing disclosures (i.e. provisionally from 30 June 2024).

Ongoing sustainability related performance information

Firms must produce disclosures on the sustainability-related performance of their products on an ongoing basis, in a dedicated sustainability product report which builds from the Task Force for Climate-related Financial Disclosures (“TCFD”) product report.3

Scope: Where the product does not have a fund prospectus or other pre-contractual disclosure requirements, firms will be required to publish “Part A” of their sustainability product report in a prominent place on a relevant digital medium where the product is offered, such as on the product webpage. Firms will also be required to ensure investors are made aware of the contents of the report before they invest in the product.

“Part B” of the sustainability product report will only be required in relation to products using a sustainable investment label (except for firms providing portfolio management services and UK AIFMs managing unauthorised AIFs not listed on a recognised exchange).

Location: The sustainability product report must be published in a prominent place on the firm’s website though, as with the existing disclosure obligation under the FCA’s ESG Sourcebook4, the FCA recognises that public disclosures are not appropriate in some situations, specifically (i) UK AIFMs managing unauthorised (and unlisted) AIFs and (ii) firms that provide discretionary portfolio management services to individuals or institutional investors. In these scenarios, the firm will be required to disclose this information on request on an annual basis.

Format: Provided the report contains the prescribed content, the Consultation Paper is not prescriptive as to the format used.

Content: Part A of the report must display the sustainable investment label (where applicable) and state the product’s sustainability objective as well as progress towards meeting that objective, and the link between the products sustainability objective and environmental or social outcome.

Part B of the report must display the sustainable investment label, and state the product’s sustainability objective as well as progress towards meeting that objective. In addition, the firm must make the following disclosures associated with the criteria under the labelling regime:

  • Principle 2 – investment policy and strategy.
  • Principle 3 – KPIs
  • Principle 5 – stewardship

Frequency: The report must be made and reviewed annually.

Sustainability entity report

Scope: All in-scope firms with AUM of £5 billion or more will be required to produce a sustainability entity report in relation to their in-scope business.

Firms with assets under administration or management amounting to less than £5 billion calculated as a 3-year rolling average on an annual assessment will be exempt from the new entity-level disclosures.

Asset managers with above £50 billion in AUM will be required to make their first disclosures by 30 June 2025, with smaller firms, excluding those with under £5 billion in AUM, required to make their first disclosures by 30 June 2026.

Location: The report must be published in a prominent place on the main website for the business of the firm (e.g. with a link from the homepage).

Format: Provided the report contains the prescribed content, the Consultation Paper is not prescriptive as to the format used.

Content: The report must contain:

  • The firm’s governance in relation to sustainability-related risks and opportunities.
  • The actual and potential impacts of sustainability-related risks and opportunities on its businesses, strategy and financial planning, where such information is material
  • How the firm identifies, assesses and manages sustainability-related risks.
  • The metrics and targets the firm uses to assess and manage relevant sustainability-related risks, where such information is material.

Where a firm uses a sustainable investment label, it must also make disclosures associated with the criteria under Principle 4 – Resources and Governance.

Frequency: The report must be made and updated annually.

Naming and marketing rules

The FCA is proposing to prohibit firms providing in-scope products to retail investors that do not qualify for and use one of the sustainable labels from using certain sustainability-related terms including (but not limited to) ‘ESG’ (or ‘environmental’, ‘social’ or ‘governance’), ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, ‘responsible’, ‘green’, ‘SDG’ (sustainable development goals), ‘Paris-aligned’ or ‘net zero’ in their product names and marketing.

The FCA also propose that ‘sustainable focus’ or ‘sustainable improvers’ products be prohibited from using the term ‘impact’ in the naming and marketing of these products.

The rules will apply to in-scope products that are made available to retail investors in the UK. Products offered to institutional investors are not in scope of these requirements.

Specific rules will apply in relation to the use of sustainability-related terms in the naming and marketing of portfolio management agreements or arrangements to retail investors. In particular, firms will be able to use such terms, provided that 90% or more of the total value of the products in which the relevant portfolio invests qualify for a sustainability label and that the terms are not used in a misleading way.

Requirements for distributors

Firms that are distributors of in-scope products to retail investors (including platforms and advisers) must display the product’s label prominently on a relevant digital medium and provide access to the relevant customer-facing disclosures. Distributors must keep the relevant digital medium and marketing communications updated with any changes a firm makes to the label and disclosures. Where the product does not use a label, the distributor must still provide retail investors with access to the consumer-facing disclosure.

Where prohibited sustainability-related terms are used in relation to the naming and marketing of overseas products that are recognised schemes, including exchange-traded funds, distributors of those products to retail investors must place a notice on that product, alerting retail investors that: “This product is based overseas and is not subject to FCA sustainable investment labelling and disclosure requirements”. The notice must be placed in a prominent place on the relevant digital medium (e.g. product webpage or page on a mobile application), and be accompanied by a hyperlink to the FCA webpage which will set out what the labelling and disclosure requirements are for retail investors that wish to know more.

Anti-greenwashing rules

These proposed rules would require all FCA regulated firms to ensure that the naming and marketing of financial products and services in the UK is clear, fair and not misleading, and consistent with the sustainability profile of the product or service.

Annex: Sustainable investment label principles

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