FCA’s new Sustainability Disclosure Requirements

The Financial Conduct Authority’s (FCA) latest announcement on the UK’s Sustainability Disclosure Requirements (SDR) and investment labelling regime is reshaping the landscape for asset managers. Originating from discussions at the 2021 COP26 Summit, these changes are pivotal for those dedicated to sustainable investment practices. For asset managers, platforms like SI Engage offer a streamlined pathway to adapt and thrive under these new regulations.

Introduction of new investment labels and marketing rules

The FCA’s policy statement introduces four investment labels with distinct criteria:

1. Sustainability Focus: Preserving a 70% investment threshold, this label shifts towards a ‘robust, evidence-based standard’.

2. Sustainability Improvers: Targets more precise goals to avoid being a general category, emphasising specific short and medium-term targets.

3. Sustainability Impact: Focuses on the positive influence of fund assets, offering a flexible approach to capital allocation.

4. Sustainability Mixed Goals: A new category for multi-asset funds, blending objectives of the other labels with unique disclosure requirements.

Additionally, marketing rules have been updated, including ‘Unexpected’ disclosures, ensuring clarity and transparency in investor communications.

The ‘Do No Significant Harm’ principle is integral to the SDR, requiring funds to ensure their investments do not significantly harm social or environmental aspects.

Disclosure requirements: A new era of transparency

The FCA mandates unchanged consumer-facing disclosures, the potential integration of the UK’s taxonomy, and ISSB’s standards in product-level disclosures. Firms with over £5 billion AUM must make annual entity-level disclosures.

The roadmap to compliance: 2024-2026

The FCA outlines a timeline for compliance:

• Anti-greenwashing rule: Effective May 31, 2024.
• Investment labels availability: From July 31, 2024.
• Ongoing disclosures for firms with £50bn+ AUM: Starting December 25, 2024.
• Entity-level disclosure for firms with £5bn+ AUM:*By December 2026.

Stewardship shortcomings revealed

The FCA’s assessment has highlighted challenges in the stewardship approaches of fund managers. A critical concern is the lack of clear evidence of progress stemming from their engagement activities. Many firms have shown significant reliance on stewardship activities, yet they struggle to demonstrate concrete outcomes. Specifically, they often fail to show how these activities align with and support the investment objectives of their funds. This misalignment indicates a need for more robust and outcome-focused stewardship strategies.

Best practices for effective stewardship

On the brighter side, the FCA has identified commendable practices in stewardship that can serve as a strategic model:

• Integration of stewardship within investment teams: Successful fund managers embed stewardship activities directly within their investment teams. This approach ensures that investment managers take ownership of the engagement activities, supplemented by the support of a central stewardship team. This integrated model fosters a more cohesive and effective stewardship strategy.
• Measuring and documenting stewardship outcomes: Another key practice is the meticulous measurement and recording of the outcomes from stewardship activities with investee companies. This process is essential in understanding how these activities contribute to the ESG and sustainability objectives of the fund range. Such transparent and quantifiable recording of outcomes not only aligns with the new SDR requirements but also enhances the credibility and effectiveness of the stewardship efforts.

SI Engage: A platform to enhance stewardship practices

For asset managers, particularly those exploring or new to SI Engage, the platform offers invaluable tools and resources to overcome these challenges. SI Engage can facilitate the integration of stewardship within investment teams and assist in tracking and reporting the outcomes of stewardship activities. By leveraging these capabilities, fund managers can align their stewardship strategies with the investment objectives of their funds, meeting the FCA’s expectations and enhancing the overall effectiveness of their sustainable investment practices.

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