Sustainability Disclosure Requirements Explained

The Financial Conduct Authority (FCA) has introduced measures to help consumers navigate the market for sustainable investment products. Their aim is to ensure that “financial products that are marketed as sustainable should do as they claim and have the evidence to back it up”.

This is achieved through:

• An anti-greenwashing rule that applies to all FCA-authorised firms who make sustainability-related claims about products and services
• Investment labels, disclosure, and naming and marketing rules that apply to UK asset managers
• Targeted rules that apply to distributors of investment products to retail investors in the UK (such as Evelyn)

Greenwashing is the practice of making exaggerated, misleading, or unsubstantiated sustainability claims to attract consumers and encourage them to invest in a product.

To mitigate greenwashing risks, these measures have been put in place help consumers make informed decisions about which investment products meet their sustainability objectives. They’re designed to ensure any sustainability references made by a firm are fair, clear, and not misleading, as well as being proportionate to the sustainability profile of the products and services in question.

The FCA has introduced four investment labels for products with sustainability objectives that aim to improve or pursue positive outcomes for the environment and/or society.

To qualify for a label, a product must have a sustainability objective that is clear, specific, and measurable and included in the product's investment objectives. The sustainability objective is an explicit statement of intention to invest 'with the aim of directly or indirectly improving or pursuing positive environmental and/or social outcomes'.

Based on their sustainability‑related objectives and features, products that meet the requirements will be permitted to use one of the following four sustainability labels:

Sustainability Focus: these funds invest mainly in assets that focus on sustainability for people or the planet. Examples may include activities to support the production of energy, for example, from solar, wind or hydrogen.

Sustainability Improvers: these funds invest mainly in assets that may not be sustainable now but aim to improve their sustainability. Examples may include investments in companies that are on a credible path to net zero by 2050 or are committed to improving social standards such as human rights.

Sustainability Impact: these funds invest mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet. Examples may include renewable energy generation and social housing.

Sustainability Mixed Goals: these funds invest mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet. Examples may include a mixture of investments from the labels above (Focus, Improvers and Impact).

Sustainability disclosures have also been introduced to help consumers understand the key sustainability-related features of a product, including:

• What the sustainability goal of the fund is
• The approach to achieving it
• Annual updates on progress towards the goal