ESG and sustainable finance disclosure: where the rules stand
The UK's sustainable finance disclosure landscape has diverged materially from the EU's Sustainable Finance Disclosure Regulation (SFDR) since Brexit, creating a distinct domestic regime that firms operating cross-border must navigate separately. The FCA's Sustainability Disclosure Requirements (SDR) and investment labels regime, introduced through Policy Statement PS23/16, represents the centrepiece of the UK framework. The labelling rules — covering 'Sustainability Focus', 'Sustainability Improvers', 'Sustainability Impact', and 'Sustainability Mixed Goals' — became operative for asset managers from 31 July 2024, with distributor obligations following in December 2024.
To use a sustainability label, firms must meet qualifying criteria that include: a sustainability objective that is credible and specific; a policy for investing in accordance with that objective covering at least 70% of the portfolio; ongoing monitoring and reporting against the stated objective; and consumer-facing disclosure in a prescribed format. The FCA has been explicit that labels are not available for products that merely integrate ESG considerations into risk management — the objective must go further and represent a genuine commitment to positive sustainability outcomes. The anti-greenwashing rule, which came into force on 31 May 2024, applies to all regulated firms and prohibits sustainability claims about products or services that are misleading or unsubstantiated, regardless of whether a label is used.
TCFD-aligned disclosures remain a parallel obligation for large asset managers, asset owners, and listed companies. Under the FCA's TCFD rules (ESG 2 and 3 in the FCA Handbook), in-scope asset managers must produce entity-level and product-level climate-related financial disclosures annually, covering governance, strategy, risk management, and metrics and targets. The FCA's thematic review of TCFD disclosures in 2023 found significant variation in the quality of scenario analysis and in the specificity of transition planning commitments. Firms that have filed TCFD reports should review them against the FCA's good practice examples before the next reporting cycle.
The forthcoming UK Green Taxonomy, expected to build on the BEIS consultation of 2022, will eventually provide a standardised classification system for environmentally sustainable economic activities. Until the Taxonomy is operative, firms making taxonomy-related claims must rely on their own definitions, which creates greenwashing risk. Firms with EU-facing investor bases must also contend with SFDR Article 8 and 9 obligations, and the divergence between SFDR product categories and UK SDR labels means that dual-classification strategies require careful legal analysis.
Practical implications for asset managers
Firms reviewing their SDR readiness should conduct a label eligibility assessment for all sustainability-branded products, stress-test sustainability claims against the anti-greenwashing rule, and review client-facing materials for compliance with the naming and marketing rules. Firms that cannot meet label criteria should consider whether existing sustainability claims in marketing materials are defensible, or whether they require amendment before the anti-greenwashing rule is applied in enforcement.