Sustainability disclosure requirements: ‘Anti-eco-darkwashing’ laws come into force for the UK financial sector

UK-based financial firms are advised to conduct company-wide reviews of eco-darkwashing and develop internal processes to identify and avoid misleading environmental claims to comply with ground-breaking Sustainability Disclosure Requirements (SDRs). , which come into force today.

These are among 10 actions recommended by the UK Sustainable Investment and Finance Association (UKSIF) and consultancy giant PwC, which have joined forces to today produce a guide to SDR regulation to help asset managers and other financial firms deal with the new regulations anti-greenwashing.

The phased-in of SDR requirements, developed by the UK regulator the Financial Conduct Authority (FCA), is due to start today and will initially apply to asset managers and other firms making sustainable investment claims in relation to their financial products.

The package includes an “anti-eco-darkwashing provision” that from today requires all sustainability claims on financial products and services to be “fair, clear and non-misleading” to help consumers make more informed decisions.

A new sustainable investment labeling system is then due to be introduced in July to set the minimum requirements that investment funds must meet. According to the FCA, the use of the labels, accompanying disclosures and the naming and marketing rules will come into force in December this year.

Then, as part of the SDR package, entity-level disclosure rules will apply to large companies by the end of 2025, with smaller companies following suit by the end of 2026.

Published yesterday to coincide with new SDR regulations, UKSIF and PwC said their guide had therefore been developed to help financial firms address potential regulatory challenges, including those related to interoperability of fund labeling across jurisdictions; uncertainty regarding qualification criteria and standards for labeling categories; product management challenges; and tight deadlines for compliance with the “greenwashing regulation”.

James Alexander, UKSIF chief executive, said the group was committed to supporting members through the “key first year of implementation” of the SDR.

“This regulation can empower our members to better demonstrate and document their sustainable investment approaches and strategies in an environment where consumers increasingly want to put their money in funds that are more aligned with their values,” he said. “Working with our members, we want to ensure that consumers have access to clear and consistent information about the sustainability features of financial products.

“While SDR fund labels are not mandatory, they are intended to encourage more consistent disclosure across companies, improve product comparability for retail investors and, in turn, enable consumers to make more informed sustainable investment choices.”

In particular, the report urges affected companies to take a “strategic, long-term approach” to the new reporting rules, noting that – unlike the EU’s sustainability reporting regime – the UK has given companies greater flexibility to prioritize reporting on issues important for them. This should enable companies to focus their efforts on sustainability issues, which may have an impact on protection or value creation, it says.

The report’s recommendations for financial firms include Conducting a broad, company-wide review of greenwashing to ensure compliance with the anti-greenwashing principle and developing a taxonomy of terms used internally to identify and prevent future greenwashing.

The report also recommends that the company should step up its engagement with distributors as soon as possible to ensure that those distributors are familiar with each product’s core sustainability features, the use of any labels and any restrictions on offering unlabeled funds.

Affected companies should additionally establish “a company-wide product classification framework to deal with the complexity of the SDR stack as well as the international fragmentation of regulatory approaches,” it says.

Elsewhere, it calls on asset managers and other companies to “carefully consider” what label – if any – to apply to products covered by SDRs and focus on demonstrating compliance with the 70% threshold for a fund carrying a sustainability label.

The new SDR rules stipulate that funds advertised as sustainable must consist of at least 70% “sustainable assets”. The report notes that this is a less stringent approach than that used in the EU, where proposed naming guidelines would require the same product to meet the 80% threshold.

“As asset managers continue to grapple with evolving sustainable finance regulations around the world, it will be important for them to take a strategic view of the SDR stack to help address interoperability challenges,” said David Crocker, partner at PwC . “This means implementing changes to product management and sustainability reporting in a way that reflects their broader company-wide sustainability strategy.”

Commenting on today’s launch of the phased introduction of SDR regulations, Caroline Greenwell, a partner at London law firm Charles Russell Speechlys, said the regulations could be a “game changer in terms of the risk of greenwashing”.

“In the past, most allegations of green money laundering involved consumer brands and their advertising and marketing,” she said. “While these cases have raised the specter of greenwashing as a problem and prompted warnings and comments from the Advertising Standards Authority that may have been reported in other sectors, action on greenwashing issues has undoubtedly focused on the retail and food industries.

“These changes by the FCA could change all that. New anti-greenwashing rules and guidelines mean that the risk of greenwashing no longer only applies to consumer brands, but now to all FCA regulated companies that claim a sustainable product or service they offer, this could make a difference the risk of greenwashing and, depending on how active and draconian the FCA’s enforcement is, we are likely to see significant improvements in regulation and even litigation arising from investments. companies’ sustainability claims.”

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