FCA SDR and Anti-Greenwashing Rules: A Practical Compliance Guide for Financial Firms

The SDR regime has stopped being a project and started being business as usual, which is precisely when firms get caught out. The rules have been phasing in since May 2024, the FCA has now seen enough label applications to publish what good and bad look like, and there is a deadline in December that catches every asset manager above £5 billion.

The other thing worth saying up front: the anti-greenwashing rule is not an asset management rule. It binds every FCA-authorised firm that says anything about sustainability to a UK client. Banks, insurers, advisers, platforms, consumer credit firms. If your marketing team has ever put the word "green" on a product page, this applies to you.

What's Mandatory and what isn't

The single most common misunderstanding about SDR is which bits are compulsory. Worth getting straight before anything else.

The labels are voluntary. Nobody has to use one. They are available only for UK UCITS and UK AIFs, and a firm that wants one has to notify the FCA and meet the criteria.

The naming and marketing rules are mandatory. If you are a UK asset manager using sustainability-related terms for a retail product, they bind you whether or not you take a label.

The disclosures are mandatory. Pre-contractual and consumer-facing disclosures for in-scope products; product-level and entity-level sustainability reports on their own timetable.

The anti-greenwashing rule is mandatory for everyone. All FCA-authorised firms, all sustainability claims about products and services offered to UK clients.

The trap sits in the gap between the first and second points. Declining a label does not release you from the naming and marketing rules, in some respects it constrains you more, because certain words become off-limits entirely.

The Anti-Greenwashing Rule

The rule itself, at ESG 4.3.1R, is a single sentence's worth of obligation: any reference a firm makes to the sustainability characteristics of a product or service must be consistent with those characteristics, and must be fair, clear and not misleading. It took effect on 31 May 2024 alongside FG24/3, the FCA's non-handbook guidance.

FG24/3 breaks it into four tests, and they are the working checklist for anyone signing off marketing copy. Claims must be correct and capable of being substantiated. They must be clear and presented so the intended audience can understand them. They must be complete, not omitting or hiding anything material. And any comparison must be fair and meaningful.

Three points from the guidance that firms routinely miss.

Substantiation means evidence you actually hold. Not a plausible narrative, not an industry convention. If you cannot produce the basis for a claim on request, the claim is a problem. Where the evidence comes from a third-party data provider, the FCA expects you to have done some due diligence on it rather than passing it through unexamined.

It is a lifecycle obligation, not a launch-day one. Claims must stay compliant for as long as the product or service exists. A statement that was accurate at launch and has since drifted from reality is a live breach, not a historical one.

Firm-level claims sit outside the rule but not outside regulation. The AGR covers products and services. Claims about your firm as a firm are picked up instead by Principles 6 and 7, the Consumer Duty where it applies, and the CMA and ASA regimes. The CMA's Green Claims Code is the relevant standard there, and since April 2025 the CMA has had direct enforcement powers under the Digital Markets, Competition and Consumers Act.

On consequences: the FCA describes the AGR as giving it an explicit rule on which to challenge firms. The available responses run from requiring a claim to be withdrawn or amended, through fines, restrictions and suspensions, to, where a misleading statement is made knowingly or recklessly, criminal powers under the Financial Services Act 2012 reaching the firm and its directors.

No published enforcement outcome citing the AGR has emerged yet, which is unremarkable: new rules typically take two to three years before cases surface. Reading that as low risk would be a mistake for two reasons. The FCA does not need the AGR to act on greenwashing, Principle 1 on integrity and Principle 7 on fair, clear and not misleading communications have always been available, and it has said it will apply its usual supervisory and enforcement approaches where it sees consumer harm or serious misconduct. And the likelier near-term exposure is supervisory rather than headline enforcement: being asked to evidence what you did in response to the rule, and facing restrictions or a forced withdrawal of marketing material if the answer is thin. There is private-law exposure too, misrepresentation and negligence claims, and Financial Ombudsman Service complaints, all of which the AGR gives claimants a clearer hook for.

The Four Labels

Labels apply at fund level and each has a distinct logic. Confusing them is the most common application error the FCA sees.

Sustainability Focus, the fund invests in assets that already meet a robust, evidence-based standard of sustainability.

Sustainability Improvers, the assets don't meet that standard yet but have credible potential to get there. Note that Improvers is not a climate-only label; it works for social objectives too.

Sustainability Impact, the fund aims for a pre-defined, measurable positive impact, and must articulate a theory of change explaining how its investment activities produce it.

Sustainability Mixed Goals, a combination of two or more of the above.

For Focus and Improvers, at least 70% of the gross value of assets must be invested in line with the sustainability objective, measured against a standard that is robust, evidence-based and absolute rather than relative. That last word does real work. "Best in class among our peers" is a relative standard and will not carry a label on its own; you need an absolute threshold, applied consistently, with the relative language layered on top if you want it.

Naming and Marketing

The hard edge here is a short list of words. "Sustainable", "sustainability" and "impact", and variations, cannot appear in a retail product name unless the product uses a label. No exceptions for careful qualification. If you want those words, you take a label.

Other sustainability-related terms can be used without a label, but only if the product genuinely has sustainability characteristics, the name accurately reflects them, and you produce the accompanying disclosures.

Two carve-outs are worth knowing. The rules do not bite where a sustainability word is being used in an unrelated sense, "economic climate", "financial impact", because it isn't describing the product's sustainability characteristics. And short, factual, non-promotional statements are outside scope: noting that ESG integration forms part of your ordinary risk process is fine. Promoting that integration in marketing as material to the product is not; that pulls you back in.

One clarification that has caused unnecessary anxiety: the FRC's revised UK Stewardship Code, effective 1 January 2026, includes "sustainable" in its definition of stewardship. The FCA and FRC have jointly confirmed this creates no conflict, because the SDR naming rules apply only where sustainability terms describe a product's sustainability characteristics, not to the Code's definition of stewardship.

Disclosures, and the Deadline in December

Four layers, on different timetables.

Pre-contractual disclosures (ESG 5.3) for labelled products and unlabelled products using sustainability terms: the criteria behind the product's sustainability characteristics, useful metrics, and for labelled products the sustainability objective. Unlabelled products must state that they have no label and explain why.

Consumer-facing disclosures for the same population, short, jargon-free, and judged on overall impression including visuals. Where the Consumer Duty applies, these must meet retail customers' information needs and equip them to make informed decisions.

Product-level sustainability reports for firms in scope of the labelling and naming and marketing rules.

Entity-level sustainability reports for asset managers above £5 billion AUM, whether or not they use labels or sustainability terms. This is the near-term pressure point. Firms above £50 billion have reported since 2 December 2025. Everyone else above £5 billion is caught from 2 December 2026. If you are in that second cohort, the report needs drafting now, it follows a four-pillar TCFD-derived structure covering sustainability-related risks and opportunities, and it is a genuine piece of work rather than a form-fill.

Distributors have their own obligations (ESG 4.1.16R–4.1.19R): communicating labels and consumer-facing disclosures to retail investors, and, easily overlooked, displaying a notice on overseas-domiciled funds using sustainability terms making clear they fall outside UK SDR.

What the FCA's Own Review Tells You

In February 2026 the FCA published good and poor practice examples drawn from the fund authorisation process. This is the most useful document in the regime, because it is the regulator describing what it actually rejected.

Its overall verdict: applications have improved, but it often still isn't clear whether or how a firm meets the labelling criteria, or whether the disclosure reflects what the fund really holds.

The recurring failures are worth naming.

Objectives too vague to test. "Make a positive contribution to planet and people." "Contribute to the SDGs." "Create value for society." The FCA says outright that pointing at the SDGs alone will not do. An objective has to be clear, specific and measurable, a reader should be able to identify the environmental or social outcome being pursued.

Claims that collapse under questioning. A fund held a sportswear retailer on the basis that it derived at least half its revenue from health and wellbeing products; when asked, the firm couldn't substantiate it. Another claimed 100% of a diversified retailer's revenue was sustainable, and couldn't support it either. The FCA asks for a model portfolio during authorisation specifically to test disclosure against holdings.

Negative outcomes left out. You must disclose material negative outcomes arising from your approach. The example given: a fund holding industrial conglomerates with some sustainable business units alongside carbon- and water-intensive principal operations, without saying so. Good practice looked like a sustainable infrastructure fund acknowledging that new build can damage landscapes and biodiversity.

Scope creep in climate objectives. An Improvers fund whose objective covered only Scope 1 and 2 reductions, but whose language implied all emissions including Scope 3. That is a naming-and-marketing and AGR problem as much as a labelling one.

Governance dressed as outcome. An asset scoring 8/10 mainly on governance policies, with no clear environmental or social result. The FCA's line is that governance enables outcomes but is not itself the end.

Engagement without teeth. Improvers funds need an escalation plan. Continuing to engage with laggards indefinitely, with no timeframe and no stated next step, or on a timeline that doesn't match the fund's own targets, is called out as poor practice.

Double counting in Mixed Goals. Counting the same 10% holding towards both a Focus proportion and an Improvers proportion of the threshold.

And one piece of process advice the FCA gives explicitly: don't copy its worked examples or your competitors' disclosures. Copied wording is a reliable signal that a disclosure doesn't describe the actual fund.

What to Do About it

The compliance work divides into three honest categories.

Fix the drift. Because the AGR is a lifecycle obligation, the highest-risk material in most firms is not the new launch, it's the fund page written in 2023, the pitch deck nobody has revisited, the factsheet claim that made sense before the portfolio moved. Run a sweep of live sustainability claims across every channel, including material you inherited. Test each against the four FG24/3 questions.

Build the evidence file. For every sustainability claim of substance, someone should be able to produce the supporting evidence without a scramble. Where the evidence is third-party data, record what due diligence you did on it. If your standard of sustainability is a scoring system, the criteria behind each score need writing down, including what an asset must demonstrate to clear the threshold.

Close the ownership gap. SDR fails at the seams, marketing writes copy that outruns what the investment team can evidence, or the product team takes a label whose criteria the distribution material then misdescribes. Someone senior needs to own the consistency between objective, disclosure, portfolio and marketing. In practice that means a named sign-off before any sustainability claim goes out, and a periodic review that revisits claims already published.

One forward-looking note: on 5 June 2026 the FCA proposed scrapping product-level TCFD reports altogether, in Chapter 2 of its Quarterly Consultation CP26/17. The replacement would be fewer, more targeted and outcomes-based rules, retail investors getting information on material climate risks to a product's financial performance, institutional clients able to request Scope 1, 2 and 3 emissions data on demand rather than receiving full published reports. The FCA's own post-implementation review found TCFD product reports too long and complicated for retail investors, while institutional investors were bypassing them and going direct to firms. Estimated saving: around £20 million a year across the sector. The consultation closed on 13 July 2026 with the FCA aiming to finalise in the autumn, but until final rules are made, the existing product-level TCFD requirements stand. Don't stop producing them on the strength of a consultation.

The regime is principles-based by design, which cuts both ways. There is room to describe a genuine strategy in your own terms. There is nowhere to hide a claim you cannot evidence.

Compliance Checklist

1. Confirm which parts apply: the AGR binds every FCA-authorised firm; naming, marketing and disclosure rules bind UK asset managers; labels are voluntary.
2. Audit every live sustainability claim across all channels against FG24/3's four tests, correct and substantiated, clear, complete, fairly compared.
3. Check no retail product name uses "sustainable", "sustainability" or "impact" without a label.
4. For labelled funds, verify the objective is clear, specific and measurable, and that it isn't just a gesture at the SDGs.
5. Confirm your standard of sustainability is absolute, evidence-based and applied consistently, with the criteria documented.
6. For Focus and Improvers, evidence the 70% threshold; for Mixed Goals, check for double counting.
7. Disclose material negative outcomes and conflicts, not just the positive case.
8. For Improvers, put a dated escalation plan behind your engagement, aligned to the fund's targets.
9. If you are above £5 billion AUM and under £50 billion, start the entity-level report now for 2 December 2026.
10. Assign named ownership for consistency across objective, disclosures, portfolio and marketing, with periodic re-review.

Position as of July 2026. The SDR rules sit in the FCA's ESG Sourcebook and are amended periodically, see Handbook Notice 136 for the December 2025 changes, and the FCA's fund-level climate reporting consultation remains outstanding. Verify current requirements against the FCA Handbook and take professional advice for your firm's circumstances.

Sources

FCA, PwC UK, Herbert Smith Freehills Kramer, Hogan Lovells, Simmons & Simmons, Kingsley Napley, CMS Law-Now, Foot Anstey, Linklaters, Dechert, Browne Jacobson, Jones Day, AREF, The Investment Association

This article is intended for general professional information and does not constitute legal, financial, or investment advice.