Summary
Cut through the green tape
We don’t push agendas. At Net Zero Compare, we cut through the hype and fear to deliver the straightforward facts you need for making informed decisions on green products and services. Whether motivated by compliance, customer demands, or a real passion for the environment, you’re welcome here. We provide reliable information—why you seek it is not our concern.
Details
Deep dive
Background
Following a public consultation conducted between October 2022 and January 2023, the UK Financial Conduct Authority (FCA) in November 2023 published a Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels. The overall goal of the policy is to address concerns about greenwashing, i.e. the practice of making false, misleading, or exaggerated claims about the environmental benefits of a product, service, or company to appear more sustainable than they are. The FCA's sustainability disclosure rules operate within the context of efforts by other government agencies to tackle greenwashing. The Green Finance Strategy (2019) laid the groundwork for anti-greenwashing policies by promoting transparency in sustainable investments, while the Financial Reporting Council (FRC) in four thematic reviews published between 2020 and 2025 encouraged companies to improve climate-related financial disclosures in their financial statements. The Task Force on Climate-related Financial Disclosures (TCFD) framework became mandatory for large UK-listed firms in 2022, requiring them to report climate risks and sustainability efforts. Also, the UK's Competition and Markets Authority (CMA) introduced the Green Claims Code in 2021 to prevent misleading environmental claims in consumer markets. However, these previous initiatives are broadly targeted. The FCA's sustainability disclosure rules provide sector-specific requirements dealing with financial or investment products and services.
What are the rules?
The FCA's sustainability disclosure and labelling policy establish a set of rules which together seek to enhance trust and transparency in sustainable investment products and services giving buyers the trust that the products and services do what they advertise.
Anti-greenwashing rule: This rule, which took effect on 31 May 2024, aims to ensure that all FCA-authorized firms make sustainability-related claims about their products and services in a fair, clear, and accurate manner. These claims must align with the actual sustainability profile of the product or service. The rule is applicable to all communications (statements, images, strategies, targets etc) about financial products or services that reference their sustainability features such as a certain carbon emissions profile.
Investment labelling rules: This set of rules, which took effect on 31 July 2024, establish four investment product labels to help buyers distinguish between different sustainability objectives and the investment approaches to realize these objectives.
Sustainability Focus: The Sustainability Focus label on a product should align with the goal of investing at least 70% of the product's assets according to the sustainability objective, based on a rigorous, evidence-driven standard that serves as an absolute measure of sustainability - e.g. a minimum threshold of carbon emissions for assets. While at least 70% of a Sustainability Focus product’s assets must meet this standard, the remaining assets must not contradict the sustainability objective.
Sustainability Improvers: The Sustainability Improvers product label means that it has the objective of investing in assets that have the potential to enhance sustainability in the future. At least 70% of a Sustainability Improvers product’s assets must be invested accordingly. Moreover, firms are expected to reveal how long it will take for the investment product and/or its assets to reach the expected standard along with short- and medium-term targets.
Sustainability Impact: The Sustainability Impact product label should align with a goal of delivering a predefined, measurable positive impact on an environmental and/or social outcome, while investing at least 70% of its assets accordingly. Firms must outline a theory of change, detailing how their investment activities and the product’s assets are expected to generate this positive impact.
Sustainability Mixed Goals: This label applies to products with a sustainability objective allocating at least 70% of investments using a combination of sustainability objectives. Firms must identify the share of assets invested according to any combination of the other labels while ensuring compliance with the requirements of each of those labels.
Naming and Marketing rules: This set of rules establishes naming and marketing requirements for asset managers to assist consumers in distinguishing between investment products with sustainability objectives that use any of the labels above and those with sustainability characteristics that don't use a label because they do not qualify for one. The naming and marketing rules specify requirements for the use of sustainability-related terms such as green and climate and any other terms suggesting that an investment product has sustainability features. For firms using product labels, the naming and marketing rules took effect on July 31, 2024. For firms using sustainability-related terms without product labels, naming and marketing rules, took effect on 2 December 2024.
Consumer-facing disclosure rules: Consumer-facing disclosures, should offer clear, accessible, and user-friendly information on the key sustainability characteristics of investment products, enabling consumers to evaluate whether these products align with their needs and preferences. For purposes of consistency, the FCA provides parameters for the structure and content of consumer-facing disclosures, but it does not provide a template. For firms using product labels, the consumer-facing disclosure rules took effect on July 31, 2024. For firms using sustainability-related terms without product labels, the consumer-facing disclosure rules took effect on 2 December 2024.
Detailed product-level disclosure rules: Product-level disclosures in a sustainability product report are intended to provide more detailed information than consumer-facing disclosures. This is designed to benefit consumers seeking deeper insights, as well as other stakeholders like institutional investors. All products that use labels or sustainability-related terms in their names and marketing must provide this detailed product-level information. Moreover, firms are required to regularly review and update these disclosures as needed, particularly when modifying or discontinuing a label. For firms using product labels, the detailed product-level disclosure rules for disclosures to the general public took effect on 31 July 2024 while rules for the provision of on-demand disclosures to eligible clients take effect from 2 December 2025. For firms using sustainability-related terms without product labels, rules about ongoing product-level sustainability disclosures take effect 12 months after the terms are first used and yearly thereafter.
Distributor Requirements: Distributors must communicate the label and consumer-facing disclosures for both labeled and unlabeled funds to retail investors. This can be done by clearly displaying the label on relevant digital platforms and sharing consumer-facing disclosures within their other communication channels. Distributors must also ensure that labels and disclosures are updated regularly in line with any changes made by the firm to its products. These rules took effect on 31 July 2024.
Which companies are affected?
The anti-greenwashing applies to all FCA-authorized firms in the UK that make claims about sustainability features in their investment products and services.
The investment labels, disclosure, and naming and marketing rules apply to UK asset managers.
The rules currently do not apply to portfolio management products and services. However, the FCA has stated its intention to hold further consultations with a view to a broader application of the rules. The FCA's sustainability disclosure rules are also of interest to financial advisers, industry groups, consumer organizations, and other stakeholders.
Penalties for non-compliance
The documentation of the FCA's sustainability disclosure rules does not identify specific penalties, financial or otherwise, for non-compliance. Nevertheless, it notes that the FCA will follow its usual supervisory and enforcement mechanisms in the implementation of the rules. Enforcement action might be taken should there be any indication of serious misconduct. A recent and major case of enforcement action by the FCA was targeted at the now-failed London Capital & Finance plc (LCF). The company was ordered by the FCA to withdraw misleading promotional materials for minibonds in which investors were not informed about the true nature of the minibonds. Firms under the scope of the FCA's sustainability disclosure rules might therefore be similarly ordered to discontinue the promotion or sale of investment products with misleading or false sustainability claims. Fines and/or prison sentences might also be imposed on specific employees responsible for making false statements as was recently the case with the former Finance Director of a UK-based technology solutions firm.
