@FCA.

What’s happening?

The UK’s regulatory body, the Financial Conduct Authority (FCA), has announced its plans to offer companies “temporary flexibility to comply with ‘naming and marketing’ rules under our Sustainability Disclosure Requirements (SDR) regime until 2 April 2025”.

The SDR and investment labels regime (PS23/16) were published in November 2023 after much consultation with the industry. 

The FCA’s statement on the changes said that “With global assets under management in environmental, social and governance (ESG)-oriented assets expected to increase to $34 trillion by 2026, this package of measures, including the consumer-focused labels”, would:

• protect investors by helping them to make more informed decisions when investing
• help maintain the UK’s position as a world-leading, competitive centre for asset management and sustainable investment

“Our anti-greenwashing rule took effect from 31 May 2024. Since 31 July 2024 managers of UK-based investment funds have been able to use investment labels on their products,” the FCA’s statement added.

Naming of funds has been a contentious issue in recent years. Earlier this year, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published its final report containing guidelines on funds’ names using ESG or sustainability-related terms – which it said it hoped would stamp out issues around perceived ‘greenwashing’. 

ESMA’s new guidance set out requirements for fund managers using these terms in fund names. Its desired aim is to reduce greenwashing risks and to enhance investor protection from exaggerated or misleading sustainability claims, it said. 

The fear of being caught around ‘greenwashing’ has been noted for some time. Earlier this year, Morningstar also released research that said continued uncertainty around greenwashing and the consequences of possible mis-labelling of funds had driven more investors and fund managers to leave ESG-compliant funds in Q1 2024 in favour of those that were either not compliant or only semi-compliant. 

In its press release, the FCA was detailed in its expectations of what companies could take from this announcement: “Firms must continue to comply with all other relevant rules, including the anti-greenwashing rule,” it said.

The temporary measures also do not apply to funds using other sustainability-related terms in their names that are not specified elsewhere. 

What else does the FCA say?

The FCA has now published advice stipulating that firms should now be taking all “reasonable steps” to ensure compliance with the ‘naming and marketing’ and disclosure rules, which have come into force from 2 December 2024. 

"Some firms wishing to use an investment label, or which need to change the names

of their products, require more time to meet the higher standards."

“The SDR is a new regime that raises the bar. We have provided support to firms to help them meet these new higher standards,” it said. “In recent weeks, we have been encouraged to see good progress made by firms to comply with the rules, and a strong pipeline of fund applications from firms wishing to use the labels."

However, it added that “Through engagement with industry and their representative trade bodies, it has become clear it has taken longer than expected for some firms to make the required changes”.

“In particular, some firms wishing to use an investment label, or which need to change the names of their products, require more time to meet the higher standards and prepare the disclosures needed for our approval,” said the FCA. “Given the importance of getting SDR right for investors, we are seeking to take a pragmatic and outcomes-based approach to provide further support to those firms which may need additional time to operationalise any changes required.”

Market reaction was largely in agreement with the FCA, and some said it would help with compliance. “By allowing this ‘temporary flexibility’, the FCA has given a little breathing room for funds to apply a label if they have ‘sustainability’ or ‘impact’ related terms in the name,” said Bhavik Parekh, Research Associate at London-based investment advisory company MainStreet Partners.

"It has become clear it has taken longer than expected for some firms to make the

required changes to ensure compliance."

“This will allow further time for asset managers to complete the authorisation process (which is taking some longer than anticipated) and gives more time to prepare all the necessary documentation. However, it should be noted that for the vast majority of funds that are in scope of the naming and marketing rules, i.e. more general ESG funds, these will still have to comply by December 2 [2024].”

Law firm Linklaters said some firms that wished to use an investment label, or which needed to change the names of their products, required more time to meet the higher standards and prepare the disclosures needed for the FCA's approval.

 

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