FCA consults on extending its Sustainability Disclosure Requirements to firms carrying out portfolio management

The FCA published two papers on 23 April 2024: a consultation paper on the extension of its Sustainability Disclosure Requirements (SDRs) to firms carrying out portfolio management (which follows its previous proposals for sustainability disclosure requirements for fund managers which we covered in our briefings here and here); and finalised non-handbook guidance on the anti-greenwashing rule.

Scope

It is important to note that the scope of portfolio management in the FCA's ESG Sourcebook is wider than in the rest of the Handbook. For the purposes of the SDR extension, "portfolio management" is a service provided to a client which comprises either:

• managing investments; or
• private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities.

However, the FCA has descoped from its new rules portfolio management agreements or arrangements where the client is (a) resident outside the UK; (b) a legal entity with its registered office outside the UK; or (c) a fund, or AIFM / ManCo for or on behalf of a fund. This means that UK private equity AIFMs will be caught but UK private equity entities which only act as delegated portfolio managers or advisers will be outside the scope of the SDRs.

This makes the scope of the rule messy to understand for firms and certainly not as blanket as, say, the EU Sustainable Finance Disclosure Regulation. The FCA expects this proposal to apply to approximately 400 UK firms providing portfolio management services including wealth managers, private banks and asset managers but there is certainly some scoping that needs to be done for many in the first instance.

There are three sets of requirements applicable to portfolio managers under the SDRs, with each applying to a different sub-set of portfolio managers:

• Sustainability Labels: will apply on an opt-in basis for in-scope portfolio managers with either retail and professional clients.
• Naming and Marketing Rules: will apply to in-scope portfolio managers with retail clients.
• Consumer-facing Disclosures: will apply to in-scope portfolio managers with retail clients which use a sustainability label or sustainability-related terms only.
• Product-level Disclosures: will apply to portfolio managers with either retail or professional clients which use a sustainability label. These will also apply to retail portfolio management offerings which use sustainability-related terms. 
• Entity-level Disclosures: will apply to all portfolio managers with over £5bn AuM.

Sustainability labels

The FCA's proposed approach for portfolio manager sustainability labels is broadly aligned with that introduced for fund managers. The same labels are used and the FCA proposes to maintain the 70% contribution criteria, whereby 70% of the overall arrangement would need to be invested in accordance with the sustainability criteria and other qualifying criteria in order for a label to be used. Importantly, the FCA clarifies that regardless of whether a portfolio manager invests in funds or directly in securities, both will be treated as "assets" implying there is no "look-through" approach to the underlying assets of funds. 

The portfolio manager is responsible for ensuring that funds with a labelled portfolio meet the requirements of the sustainability label. The FCA recognises that where a portfolio invests in underlying funds, not all of these funds may qualify for a sustainability label (e.g. overseas funds) and clarifies that while labelled portfolios may invest in such funds, it is the responsibility of the portfolio manager to ensure that the underlying funds meet the requirements. 

Naming and marketing rules

For in-scope portfolio managers, sustainability-related terms can be used in names and marketing if (a) the portfolio uses a label; or (b) the portfolio does not use a label but complies with the naming and marketing rules. 

The naming and marketing rules are similar to those which apply to fund managers, permitting portfolio managers to use sustainability-related terms provided they accurately reflect the sustainability characteristics of their service but without using the terms "sustainable", "sustainability", "impact" or any similar variation of the same. The same consumer-facing disclosures as under the fund managers SDR regime will apply to portfolio management arrangements using sustainability-related terms in the name or marketing materials.

Disclosures

The detailed product-level disclosures require firms to disclose the same information as under the fund managers SDR regime. There are two categories of disclosures: (a) pre-contractual disclosures; and (b) ongoing product-level disclosures which are issued on an annual basis. 

In addition, qualifying portfolio managers will also need to issue entity-level disclosures which are consistent with the four-pillar framework developed for TCFD, but with a focus on sustainability-related risk and opportunities more broadly (as opposed to climate-related risks and opportunities only). 

Next steps under SDR proposals

There is a short lead-time to the introduction of the SDR extension to portfolio management. This is not surprising as the FCA trailed its intention in its previous consultation and policy statements applying the SDRs to fund managers and therefore likely considers it has already put portfolio managers on notice.

Under the FCA's current timeline, portfolio managers will be able to use the sustainability labels from 2 December 2024. In-scope portfolio managers will also need to make the accompanying disclosures from this point and the naming and marketing rules will also come into force on this date. This is the same date as the naming and marketing rules come into force for fund managers, giving portfolio managers considerably less time to prepare. 

The second major milestone is 2 December 2025, which is the deadline for the first ongoing product-level disclosures and the first entity-level disclosures for portfolio managers with AUM in excess of £50bn.

For portfolio managers with AUM in excess of £5bn (but less than £50bn), the entity-level disclosures will apply from 2 December 2026.

Finalised guidance on anti-greenwashing rule

In addition to the CP on the SDRs for portfolio managers, the FCA also published its finalised guidance on the anti-greenwashing rule. This follows the guidance consultation on the same which was published in November 2023. 

The anti-greenwashing rule applies from 31 May 2024 and requires (under ESG 4.3.1R) that firms must "ensure that any reference to the sustainability characteristics of a product or service is: (a) consistent with the sustainability characteristics of the product or service; and (b) is fair, clear and not misleading". 

The anti-greenwashing rule applies when a firm: (i) communicates with clients in the UK in relation to a product or service, or (ii) communicates a financial promotion (or approves a financial promotion for communication) to a person in the UK. 

The Finalised Guidance sticks very closely to the original guidance consultation text.  We attach in pdf a redline showing the changes between the two publications for ease of reference. 

The key aspects of claims that reference sustainability characteristics are that they should be:

• correct and capable of being substantiated – here the finalised guidance now includes a good practice example where a fund makes social sustainability claims and how that is reflected in the investment process of the fund.
• clear and presented in a way that can be understood – here the finalised guidance adds emphasis to the need for technical language to be explained and adapted for the intended audience.  There is also additional clarity in the finalised guidance that it does not "extend to the use of images, logos, and colours in a context not intended to refer to, or describe, the sustainability characteristics of a product or service (although other rules may apply)".
• complete – firms should not omit or hide important information and should consider the full life cycle of the product or service – an additional good practice example is added here in the finalised guidance with respect to the methodology for asset selection used by a fund that targets "carbon intensive companies with credible transition plans to finance their decarbonisation".
• fair and meaningful in relation to any comparisons to other products or services – here the previous example of "the UK's greenest car insurance" has been removed from the guidance. 

All firms and in particular marketing teams/financial promotion approvers should now incorporate the finalised guidance as part of their marketing / financial promotions processes.