The UK Financial Conduct Authority (FCA) on Sustainability Disclosure Requirements

On November 3rd 2021, the FCA published a Discussion Paper on Sustainability Disclosure Requirements (SDR) and investment labels (DP21/4). The Discussion Paper sets FCA’s proposal on the following main initiatives:

Product labelling: a standardised product classification and labelling system
Disclosure regime (different from the EU disclosure regulation requirements)
Consumer-facing disclosures: Product disclosures containing key product-level information for consumers
Detailed disclosures at product and entity level – detailed disclosures, providing more granular information aimed at institutional investors
These key points form part of the FCA’s ESG Strategy (announced on the same day) and are also part of the Government’s Roadmap to Sustainable Investing (published earlier in October).

The proposals in this discussion paper are aimed at UK firms involved in asset management and decision-making processes.

FCA will also in due course introduce sustainability-related disclosure requirements for financial advisers, requiring financial advisors to take sustainability matters into account in their investment advice and to understand investors’ preferences on sustainability as part of the suitability assessment.

FCA has no official position at this state on how overseas funds (incl. EU funds) products should be treated in the UK.

1. Product labelling
   The FCA sets out a classification and labelling system that complements Sustainability Disclosure Requirements (SDR) and covers the full range of investment products available to retail consumers (not only ‘sustainable’ products).

The FCA’s gives some indicative mapping against the current SFDR categories (Articles 6, 8 and 9), to simplify the position of firms, which might have already categorised their products according to the EU SFDR coming into force in March 2021.

Disclosure regime
FCA’s current proposal is to have two levels of sustainability disclosures: 1) consumer facing disclosures and 2) detailed underlying disclosures meant for sophisticated and institutional investors.

1. Consumer Facing Disclosures
   The consumer facing disclosures will be aimed at retail investors and will cover the most important sustainability information which will allow private investors to make informed investment decisions.

The FCA suggests including the following key information on the consumer facing disclosures:

• investment product label
• objective of the product, including specific sustainability objectives (for example, to reduce the carbon intensity of investments while providing a financial return to clients)
• investment strategy pursued to meet the objectives, including sustainability objectives
• proportion of assets allocated to sustainable investments (according to criteria set out in the UK Taxonomy)
• approach to investor stewardship
  wider sustainability performance metrics (supported by brief contextual information)
• The FCA suggest that firms provide some baseline sustainability metrics in the disclosure – for example carbon reduction metrics.  These may be the TCFD based metrics supplemented by other metrics to address social and governance issues. The baseline set could include the core metrics required under our proposed TCFD-aligned disclosure rules, supplemented by other Social (S) and Governance (G) metrics.

a) Detailed Product level disclosures
The product level disclosures will be produces in addition to the consumer facing disclosures highlighted above. The FCA envisages the following information to be covered by the detailed product level disclosures:

• information on data sources, limitations, data quality etc
• further supporting narrative, contextual, and historical information
• further information about UK Taxonomy alignment
• information about benchmarking and performance

b) Entity level disclosures
For the SDR entity-level disclosures the FCA suggests building on their proposed TCFD disclosure requirements for asset managers and asset owners. This would introduce a familiar reporting framework.

Many UK firms operate on a global basis and therefore the FCA propose flexibilities that would allow firms to make disclosures at the level of consolidation which they consider would be most decision-useful for clients and consumers. This approach also recognises that many firms are already making TCFD-aligned disclosure rules voluntarily at a group level.

Next steps

The FCA is asking industry participants for comments on DP21/4 by January 7th, 2022. The FCA plans to review the responses to the paper and then to publish a consultation paper in Q2 2022.

We will continue to update you once more information from the regulators is published.