SDR and investment labels: pre-contractual disclosure examples

What’s new?

On 1 November 2024, the FCA published a document with respect to its Sustainability Disclosure Requirements (SDR) and investment labels regime, which enters into force on 2 December 2024.

The rules apply to UK asset managers and cover the naming and marketing rules regarding the use of certain sustainability related terms in product names and marketing materials. See our client note on the SDR regime here.

The FCA explains that the regime is new and specific criteria must be met and supported by disclosures in order for firms to qualify for a label. As the regime is – in the FCA’s view – ‘without precedent’, market practice is ‘naturally evolving’.

The FCA has, therefore, set out a series of examples of good and poor practice across a selection of labels. The examples given (which are based on the FCA’s experience of applications to date) are non-exhaustive but are intended to aid applicants as they prepare their documentation.

Among the examples of poor disclosure practices, which the FCA has determined do not meet the SDR requirements are the following:

• disclosing an asset selection process that does not link to a product’s specified sustainability objective and aim;
• where the disclosed approach to asset selection fails to include an explanation and evidence as to why the scoring or threshold is appropriate for defining sustainability;
• failing to disclose, where applicable, that a manager has an override for asset selection.
• For a Sustainability Improvers label:
  • failing to disclose the types of evidence which the manager relies on in order to satisfy itself that assets have the potential to meet the robust, evidence-based standard;
  • where short and medium-term targets are either missing or inconsistent with the long-term horizon over which assets are expected to meet the standard of sustainability.