Real estate funds - staged implementation of the FCA's sustainability disclosure regime - what do you need to know?

In November 2023, the FCA released a long-awaited policy statement setting out final rules and guidance for its sustainability disclosure and investment labelling regime. The regime seeks to improve transparency and integrity in financial products by requiring that:

• products which are marketed as sustainable do as they claim
• the sustainability characteristics of such products are not exaggerated
• evidence can be provided to back up sustainability claims in relation to such products, and
• investors can easily determine whether funds marketing ESG strategies meet their investment needs.

The regime will come into force in stages from 2024. Our Financial Services Regulatory team considered the new policy statement in depth in December 2023 – please follow this link for their helpful analysis.

What do real estate fund managers need to be aware of?

The FCA's rules and guidance promise to provide a welcome structure for real estate fund managers who are looking to market genuine ESG driven strategies and to attract institutional capital with similarly aligned goals.

Labelling criteria

Four labels are being introduced to assist consumers, which can be used from 31 July 2024 provided certain criteria are met. The new criteria will require fund managers to ensure that sustainability characteristics are material to the product (including its objectives, investment policy, and strategy) and more specifically, that at least 70% of investment is channelled into assets which meet the fund's sustainability objectives. To measure this, the assets must be selected according to a "robust and evidence-based standard", and one which is an absolute measure of sustainability. The FCA has helpfully set out examples of how the labels may apply to real estate funds:

• "Sustainability Focus" can be achieved by investment in long-term asset funds investing in a range of environmentally sustainable real assets, and "resilient real estate".
• "Sustainability Impact" can be achieved by investing in assets with a pre-defined positive measurable impact.  The FCA gives the example of a “Social Impact Real Estate Fund” which aims to provide capital and income growth through investment in socially positive real estate assets, such as those focused on reducing homelessness.

Naming restrictions

Fund managers should be aware that product names and marketing rules will apply where the real estate fund uses a label.

What can real estate funds do now?

These measures should support sustainable strategies, increase clarity for consumers, and meet increased institutional investor demand for sustainability driven funds. As such they will benefit consumers and provide clarity to real estate funds on how they can demonstrate that sustainability characteristics are material to their product. Real estate funds have some time before the new labelling criteria can be used to understand the new requirements and consider the steps required to enable them to meet the qualifying criteria for the labels. Prior to that, and noting that the implementation of the FCA regimes will be staggered throughout 2024, real estate funds should already be proceeding with care when using sustainability related language across all communications, to avoid potential language misuse and the risk of greenwashing.