Firms have been able to use sustainability labels under the SDR regime since July 2024. The labelling part of the regime seeks to improve transparency and equip consumers with information to navigate the market.
To support, the Financial Conduct Authority has issued some useful guidance, as well as some examples of both good and poor practice.
While implementing sustainability labelling, the FCA found examples of good and poor practice disclosures.
The examples have been set out under each of the 4 labels: Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals. You can view the full set of examples here: Sustainability Disclosure Requirements labels: good and poor practice | FCA
The examples are intended to help firms prepare pre-contractual disclosures for use of labels, following the pre-contractual disclosure examples that were published previously.
1. Who this applies to
This will be of interest to firms in scope of SDR that wish to adopt labels for authorised and unauthorised funds
This does not cover pre-contractual disclosures for unlabelled funds in scope of our naming and marketing rules.
2. Relevant rules and guidance
These examples refer to:
- The criteria for use of labels in our Environmental, Social and Governance sourcebook (ESG) 4.2.
- The pre-contractual disclosure rules in ESG 5.3 (as they apply to labelled funds).
- The anti-greenwashing rule and non-handbook guidance (FG24/3).
- Annex 2 of the SDR Policy Statement (PS23/16), summarising the regime
3. What The FCA looked at
The findings and examples below are based on what the FCA have seen through the fund authorisations process for updating pre-contractual disclosures. They were also informed by the FCA’s engagement with industry stakeholders.
4. Background
The SDR regime aims to reduce greenwashing, help consumers navigate the market and give them information to decide which funds (labelled or non-labelled) meet their needs and preferences.
It is a principles-based regime that requires firms to substantiate their sustainability claims. It is designed to support evolution and innovation, within clear guardrails.
The FCA have said that they will continue to engage with industry and listen to feedback.
5. What The FCA found
Applications to update pre-contractual disclosures have improved, as:
- Firms have become more familiar with the requirements.
- The number of labels on the market has increased, with a broadening range of asset classes and investment strategies.
However, it was concluded that it hasn’t always been clear whether or how firms meet the labelling requirements, or whether disclosures accurately reflect what the fund invests in.
5.1. What make a good disclosure
Good disclosures are clear, concise, easy to read and understand.
For example, they:
- Avoid complex terms and explain those that are open to interpretation, such as ‘affordable’.
- Avoid duplication.
- Use a consistent narrative and logical flow of information.
They also:
- Only disclose information relevant to the fund. For example, they don’t copy wording from our examples or peers’ disclosures.
- Use the right label for the fund and meet the relevant requirements.
- Accurately reflect what the product invests in. The FCA ask for a model portfolio to check this as part of the authorisations process.
For further reading and to see the examples of both good and poor practice, visit the FCA’s website here: Sustainability Disclosure Requirements labels: good and poor practice | FCA
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