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The UK鈥檚 financial regulator has for new sustainability investment product labels that would differ from those under the EU鈥檚 Sustainable Finance Disclosure Regulation (SFDR).

The new labels 鈥� 鈥渟ustainable focus鈥�, 鈥渟ustainable improvers鈥� and 鈥渟ustainable impact鈥� 鈥� have been proposed by the Financial Conduct Authority (FCA) as part of its incoming Sustainable Disclosure Requirements (SDR), effectively the UK鈥檚 replacement for SFDR.

They form part of a package of new measures designed by the FCA to clamp down on 鈥済reenwashing鈥�, but they also mark a departure from SFDR鈥檚 Article 6, 8 and 9 classifications, which relate to disclosure requirements and are not intended to be used as product labels.

Real estate fund managers with investment strategies that seek to improve the sustainable performance of buildings could stand to benefit from the new SDR labelling system, specifically through the sustainable improvers label, which is aimed at 鈥漰roducts investing in assets to improve the environmental or social sustainability over time鈥�.

Earlier this year, European Securities and Markets Authority (ESMA) clarified that real estate funds that aim to acquire and improve the sustainable performance of buildings would not meet Article 9 requirements at the outset 鈥� despite Article 9 funds being defined as having 鈥渟ustainable investment as its objective or a reduction in carbon emissions as its objective鈥�.

Under the FCA鈥檚 proposals for SDR, the sustainable improvers label would apply to funds 鈥渨ith an objective to deliver measurable improvements in the sustainability profile of assets over time鈥�.

A consultation document, released today, says: 鈥淭hese products are invested in assets that, while not currently environmentally or socially sustainable, are selected for their potential to become more environmentally and/or socially sustainable over time鈥︹��

Organisations from the institutional real estate industry have been in discussions with the FCA in a bid to ensure ESG metrics and product labels under SDR are fit for purpose for the asset class.

A joint submission to the FCA said the UK had an opportunity to create a 鈥減lain, concise and easily understood鈥� product labelling system that 鈥渃ould be similar to the descriptions used in SFDR鈥�, to assist UK firms already working to report under SFDR.

It proposed four labels, including 鈥渟ustainable aligned鈥�, equivalent to Article 9, and 鈥渟ustainable impact鈥�, which would relate to funds that have 鈥渁s their core intention an objective/aim of making an impact through transitioning assets to a more sustainable path鈥�.

The FCA is looking to 鈥渟implify the regime鈥� by reducing the number of labels from an initial five. 鈥淭here will be three categories 鈥� including one for products improving their sustainability over time 鈥� underpinned by objective criteria,鈥� it said.

Source: Sustainability Disclosure Requirements (SDR) and investment labels

Sacha Sadan, the FCA鈥檚 director of ESG, said: 鈥淐onsumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.鈥�

Sadan said the implementation of SDR 鈥減laces the UK at the forefront of sustainable investment internationally鈥�, adding that the FCA is 鈥渞aising the bar by setting robust regulatory standards to protect consumers鈥�.

Lonneke L枚wik, CEO of European real estate association INREV, and one of the eight organisations behind the joint submission to the FCA, said: Lonneke L枚wik: 鈥淲e鈥檝e been anticipating the release of the SDR proposals and look forward to continuing to work together with other real estate industry associations as we review them and develop aligned industry comments to the FCA in response.鈥�

Melville Rodrigues, head of real estate advisory at Apex Group, who led the dialogue with the FCA, described the FCA鈥檚 proposals as 鈥渁n ESG-regulatory game-changer for UK fund managers and their investors鈥�.

The labels could be 鈥渁ttractive to, and adopted by, fund managers and investors elsewhere鈥�, he said.

鈥淭hese are neat labels which are suitable to retail as well as institutional investors, capable of being mapped to SFDR disclosure requirements and, in the US, the SEC鈥檚 recent proposals on disclosures, and reinforce the crucial anti-greenwashing principle.

鈥淚n a real estate context, such labels could be applied to reflect different stages of an asset鈥檚 life cycle. They will be useful, for example, for funds with stranded assets but which are transitioning to 鈥榞reen鈥� and encourage such transition strategies. Such strategies have an important contribution in progressing the net-zero agenda.鈥�

Rodrigues also said he could envisage market participants using the labels voluntarily 鈥渨ell ahead of the FCA finalising SDR next year鈥�.

The FCA has on its proposals which is open until 25 January 2023.

Helen Newman, head of sustainable finance at CBRE Capital Advisors, said: 鈥淲hile this is both a disclosure and product labelling regime, which differs from other frameworks, it is good to see the regulator has sought coherence with other regimes including the ISSB, the EU SFDR and the proposals by the US SEC.

鈥淭he FCA has clearly endeavoured to respond to shortfalls of the EU鈥檚 SFDR and provided clarity on the application of labels by proposing a threshold for the proportion of assets within managed portfolios that must qualify, which will support application of the requirements.

鈥淲e look forward to working with industry partners, including AREF, INREV, CREFC, BBP and others, in responding to the proposals on behalf of real estate professionals.鈥�