As COP28 gets underway, the FCA's new rules are a significant step towards greater transparency and consumer protection in the sustainable investment market
The Financial Conduct Authority’s (FCA) new Sustainability Disclosure Requirements (SDR) and investment labelling regime is set to revolutionise the financial services sector.
Announced in October 2023, the initiative aims to curb greenwashing and promote transparency in sustainable investment products. For accountants, this heralds a new era of responsibility and opportunity in guiding businesses towards sustainable financial practices.
The SDR is designed to clamp down on misleading or exaggerated claims about sustainable investment products. It introduces three types of sustainable investment product labels: sustainable focus, sustainable improvement, and sustainable impact.
These labels aim to give consumers the confidence to choose the right products for them. Phuong Gomard, partner at Mazars, warns that many firms may struggle to comply with the detailed criteria of the new rules, highlighting the need for accountants to step up their game in guiding businesses through this new landscape.
The FCA’s SDR is a response to the growing demand for sustainable investment options and the need to protect consumers from misleading claims. In October 2022, the FCA published a consultation paper (CP22/20) outlining its proposed measures. Following extensive feedback and engagement with stakeholders, the FCA has now released its final rules and guidance in a policy statement (PS23/16).
One of the key elements of the SDR is the introduction of an anti-greenwashing rule. This rule applies to all authorized firms and aims to ensure that any sustainability-related claims made by these firms are fair, clear, and not misleading. Firms must substantiate their claims with evidence and provide accurate information about the sustainability characteristics of their products or services.
Accountants will need to help businesses navigate the new SDR landscape by assisting organisations in developing the ability and capacity to disclose meaningful information on sustainability criteria. This will involve understanding and accessing sustainability performance data, and linking it back to the overall product.
As Gomard explains, “To understand and access that sustainability performance level, you would need to acquire the data and you would need to know how to use it, process it and come up with an evaluation of the sustainability performance of a portfolio of assets.”
The new SDR applies to all FCA-authorised firms that make sustainability-related claims about their products and services. This includes wealth managers, fund managers, and asset managers. The investment labels and disclosure rules specifically target UK asset managers, while distributors of investment products to retail investors in the UK are also subject to certain requirements.
Small and medium-sized enterprises (SMEs) will also need to demonstrate their environmental impact and alignment with net zero ambitions.
According to a report by AAT Comment, lenders will soon expect SMEs to identify where their business has a negative impact from an ESG perspective, and how that impact can be improved. This presents a unique challenge for SMEs, and accountants will need to step in to provide the necessary guidance and support.
The SDR and investment labelling regime will be implemented in stages. The FCA has provided a timeline for firms to adapt and comply with the new requirements. The anti-greenwashing rule will come into effect from May 31, 2024, giving firms time to review and adjust their sustainability claims.
Asset managers can begin using the investment labels from July 31, 2024, and the naming and marketing rules for asset managers will be effective from December 2, 2024.
Firms operating in the UK’s financial services sector should familiarize themselves with the new requirements, conduct thorough reviews of their sustainability claims and marketing materials, and ensure compliance with the implementation timeline set by the FCA.
For accountants, it presents both a challenge and an opportunity to guide businesses through this new landscape. As the gatekeepers of financial information, accountants will play a pivotal role in ensuring transparency and integrity in sustainable investment practices.
