FCA Proposes New Labelling and Disclosure Guidelines to Fight Greenwashing within the UK

The FCA hopes the proposals will shield client belief in ESG-related monetary merchandise and assist customers navigate the more and more advanced ESG-related monetary market.

By Paul A. DaviesNicola HiggsMichael D. Green, James Bee, and Anne Mainwaring

On 25 October 2022, the UK’s Monetary Conduct Authority (FCA) issued a session paper (the Session Paper) on Sustainability Disclosure Necessities (SDR) and funding labels.[1] In line with the FCA, funding corporations within the UK could deliberately or unintentionally be making exaggerated, deceptive, or unsubstantiated sustainability-related claims about their merchandise — also called greenwashing — which has impacted client confidence in ESG-related or sustainable funding merchandise within the UK. The proposals within the Session Paper search to handle this threat and restore client religion.


The Session Paper builds on the UK authorities’s October 2021 Roadmap to Sustainable Investing (which launched plans to implement the SDR and an funding labelling regime throughout the UK market) and on the FCA’s November 2021 dialogue paper (DP21/4) (which set out early stage views on these initiatives).

The FCA notes that it expects the proposals within the Session Paper to mirror a “place to begin” for a regime that can increase and evolve over time, together with working with different authorities departments and constructing on the worldwide baseline ESG reporting requirements being developed by the Worldwide Sustainability Customary Board (ISSB).

The Session Paper acknowledges that many corporations that can be throughout the scope of the FCA’s proposed guidelines function internationally and, due to this fact, consistency and coherence throughout jurisdictions can be necessary to many corporations. On this regard, the FCA notes that it has “so far as potential” sought to realize coherence with initiatives such because the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the proposals by the Securities and Trade Fee (SEC) within the US.[2] Nevertheless, the FCA acknowledges that the place to begin for its regime is completely different and that, because of this, there are variations in strategy.  The FCA’s coverage rationale for categorising merchandise is to assist customers determine sustainable funding merchandise and navigate the market. Subsequently the factors are designed to set a excessive bar for merchandise that make sustainability claims, which is necessary to assist clamp down on greenwashing in opposition to a backdrop of belief considerations. Thus far, the place to begin within the EU and US regimes, in contrast, has been to classify merchandise principally to find out disclosure necessities.

The FCA additionally supplies info in relation to the concerns when mapping a product categorised underneath SFDR to its proposed regime, and highlights specifically that Article 8 and 9 merchandise underneath SFDR would want to satisfy each the cross reducing standards and the class particular standards earlier than a Sustainable Funding Label might be utilized underneath the proposed UK SDR regime.  Enterprise such a mapping train will due to this fact be a key threat administration level for corporations in scope of each regimes.

The Proposals

Sustainable Funding Labels

The Session Paper proposes to introduce sustainable funding product labels, divided into three classes:

  1. Investments in property which can be environmentally and/or socially sustainable (known as “sustainable focus”). To qualify for this label, a minimum of 70% of the product’s property both meet a reputable commonplace of environmental and/ or social sustainability; or align with a specified environmental and/or social sustainability theme
  2. Investments to enhance the environmental and/or social sustainability of property over time, together with in response to the stewardship affect of the agency (“sustainable improvers”)
  3. Investments in options to environmental or social issues, to realize constructive, real-world influence (“sustainable influence”)

The FCA stresses that there is no such thing as a hierarchy between every class, and the differentiation between labels isn’t in “rank” or degree of sustainability however reasonably within the goal standards that can be used to determine the completely different functions of the sustainable funding merchandise. Corporations providing merchandise should decide whether or not they want to apply one of many labels to their merchandise (and due to this fact meet the related standards) and, to the extent that they don’t, should abide by the proposed naming and advertising guidelines (see under).

Corporations that do meet the factors for his or her funding merchandise and search to make use of the label should notify the FCA that they’re utilizing the label inside a month of doing so.

Shopper Dealing with and Detailed Disclosures

The Session Paper additionally proposes the introduction of necessary disclosure necessities, each in relation to (i) consumer-facing product degree disclosures, and (ii) extra detailed product and entity-level disclosures for institutional buyers and customers. These disclosures will kind a part of the underlying foundation of the UK’s proposed SDR regime.

The patron-facing disclosures can be meant to assist customers perceive the important thing sustainability-related options of an funding product. These disclosures would come with the product’s sustainability goal, funding strategy, and the product’s efficiency in opposition to such goal. As well as, corporations can be required to offer a abstract of the sorts of holdings that the agency would moderately anticipate customers of the product to seek out ‘shocking’ (i.e., inconsistent with the sustainability goal), contemplating elements such because the sector by which the product invests or trade-offs throughout the sustainability profile of an organization. This should be clearly signposted as “sudden investments” and embrace the kind of funding e.g., its sector and a proof as to why it’s held within the product. Such disclosures can be required each for merchandise with a sustainability funding label and people with out.

The extra detailed and granular disclosures that might be required would come with the next:

  1. Pre-contractual disclosures setting out the sustainability-related options of a product. These disclosures can be required each for merchandise with a sustainable funding label and people merchandise that aren’t labelled, however “which have sustainability-related options which can be integral to their funding technique”. This latter class of merchandise would come with these the place merchandise with sustainability-related function or goals don’t meet the factors set out by the FCA with the intention to acquire a sustainable funding label, presumably because of points such because the sustainability goal being too imprecise, or a scarcity of KPIs being monitored.
  2. Annual sustainability-product degree stories in relation to the sustainability-related efficiency of the product. This disclosure can be required for merchandise with a sustainable funding label solely.
  3. Entity-level disclosures, contained in a “sustainability entity report” which might focus on how corporations are managing sustainability-related dangers and alternatives. This requirement would apply to all corporations that handle funding funds within the UK with AUM of £5 billion or extra on a 3 12 months rolling common, and apply no matter whether or not any product of the agency has a sustainable funding label.

The product and entity-level stories would construct on the pre-existing TCFD product and entity stories required underneath the UK TCFD guidelines for asset managers.

Naming and Advertising Guidelines

The Session Paper proposes prohibiting using “sustainability-related phrases” within the naming and advertising of merchandise provided to retail buyers that don’t use a sustainable funding label. Such phrases would come with “ESG”, “inexperienced”, or “sustainable”. Particularly, this can be related for these entities that select to market merchandise with “sustainability-related options which can be integral to an funding coverage”, however that don’t use a sustainable funding label. The Session Paper states that, in these cases, corporations wouldn’t be permitted to make use of such phrases within the title of the fund, however can be permitted to make use of them when disclosing factual info in pre-contractual disclosures.

Necessities for Distributors

The Session Paper additionally proposes introducing guidelines on distributors of sure funding merchandise to retail buyers within the UK. These guidelines would require such distributors to make the sustainable funding label and consumer-facing disclosures that might be required underneath the SDR obtainable to these buyers.

Anti-Greenwashing Rule

Lastly, the Session Paper proposes together with a “clarification” that sustainability-related claims should be “clear, truthful and never deceptive” in relation to all monetary merchandise. This restatement of the FCA’s place is meant to fight greenwashing amongst commercials for monetary merchandise, and would due to this fact enter into impact previous to the brand new necessities that the Session Paper proposes.

Subsequent Steps

The Session Paper welcomes views from stakeholders as a part of a proper public session which is open till 25 January 2023, with the goal of creating ultimate guidelines throughout Q2 2023. The FCA acknowledges that lots of the proposed guidelines would require time to allow market members to regulate, and due to this fact proposes that the labelling, naming, and advertising and preliminary disclosure necessities wouldn’t come into impact till 30 June 2024 on the earliest. Nevertheless, as famous above, the FCA proposes that the “anti-greenwashing rule” will enter into impact as quickly the FCA publishes the related coverage assertion, as this rule is claimed to make clear current obligations reasonably than introducing something new.

The FCA has additionally indicated that it’s going to search to seek the advice of on how the proposals within the Session Paper could also be utilized with respect to abroad funds and work with authorities departments to see how the regime might be expanded to incorporate different funding merchandise marketed to customers (e.g., pension merchandise), and updates can be introduced with respect to those initiatives sooner or later.

Lastly, the FCA has indicated that it’s also stepping up its supervisory engagement on “sustainable finance” and enhancing its enforcement technique, together with with respect to greenwashing allegations.

How the proposals will influence the UK’s need to be on the “forefront of the sustainable funding internationally” stays to be seen, however the FCA is constant to take an energetic function within the sustainable/ESG-related finance market.

Latham & Watkins will proceed to watch these and associated developments within the UK and different jurisdictions.


[1] (CP22/20) https://www.fca.org.uk/publication/consultation/cp22-20.pdf

[2] Particularly, the SEC proposed necessities for sustainable funding funds, categorising merchandise to find out disclosures and proposing adjustments to product naming guidelines. See https://www.sec.gov/rules/proposed/2022/ia-6034.pdf and https://www.sec.gov/rules/proposed/2022/33-11067.pdf.