The FCA is offering firms temporary flexibility to comply with ‘naming and marketing’ rules under its Sustainability Disclosure Requirements (SDR) regime until 2nd April 2025.
With global assets under management in environmental, social and governance (ESG)-oriented assets expected to increase to $34trn by 2026, the package of measures, including the consumer-focused labels, aims to protect investors by helping them to make more informed decisions when investing.
What do the new rules require?
The guiding principles state that a fund that uses sustainability-related terms in its name could be misleading unless the fund pursues ESG/sustainability characteristics, themes or outcomes in a way that is substantive and material to the fund’s objectives, investment policy and strategy.
The new naming rules, for funds that are marketed/sold based on sustainability-related terms but do not have a label, require funds to have sustainability characteristics and ensure that funds’ names accurately reflect those characteristics.
In addition, sustainability characteristics should be material to that product, for example at least 70% of its assets should have sustainability characteristics.
The FCA's anti-greenwashing rule took effect from 31st May 2024 and since 31st July managers of UK-based investment funds have been able to use investment labels on their products.
The regulator says firms should now be taking all reasonable steps to ensure compliance with the ‘naming and marketing’ and disclosure rules, which come into force from 2nd December 2024.
The FCA says it has "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 says 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.
Temporary flexibility
As a result, the FCA is offering limited temporary flexibility, until 2nd April 2025, for firms to comply with the ‘naming and marketing’ rules (i.e. ESG 4.3.2R to ESG 4.3.8R of the ESG sourcebook) in relation to a sustainability product which is a UK authorised investment fund in exceptional circumstances where the firm:
- has submitted a completed application for approval of amended disclosures in line with ESG 5.3.2R for that fund by 5pm on 1st October 2024; and
- is currently using one or more of the terms ‘sustainable’, ‘sustainability’ or ‘impact’ (or a variation of those terms) in the name of that fund and is intending either to use a label, or to change the name of that fund.
Where firms can comply with the rules without requiring this flexibility, the FCA says they should do so, adding that it expects firms to comply with the rules as soon as they can, without waiting until 2nd April 2025.
It also stressed that the new naming rules are broadly consistent with its pre-SDR guiding principles, which firms should be complying with already.
Yann Bloch, head of product and pre-sales Americas at NeoXam, commented: “The FCA has signalled a clear intent to take on greenwashing in financial product marketing head on over the last few years. With portfolio managers now having to disclose any cash or derivatives they are using for liquidity or risk management purposes that do not directly contribute to their sustainability objectives, it will become even more important that they are able to provide regulators a breakdown of their whole portfolio makeups, and how each asset fits into how they market their funds.
The temporary measures offer support for firms needing more time to meet higher standards and complete preparations, reflecting the FCA's pragmatic approach. This decision aims to further assist firms as they operationalise the required changes.”
