The Financial Conduct Authority (FCA) is testing the waters for imposing new curbs on how investment managers are able to promote their funds as sustainable.
The UK’s financial regulator is cracking down on the industry’s practice of ‘greenwashing’, with its latest proposition requiring funds to comprehensively disclose how their investments meet the criteria of being environmentally friendly.
As environmental, social and governance (ESG) becomes an increasingly pressing concern across the financial industry and among the consumers the industry seeks to serve, greenwashing describes the practice of falsely advertising a product as green for the purpose of self-promotion or marketing.
The dubious practice is something The Fintech Times has investigated at length during our coverage of ethical banking; watch our webinar with Monika Liikamaa, co-CEO of the Nordic payment service provider Enfuce, here.
The proposed new rules, which are poised to come into effect from June 2024, seek to stamp out this practice for good, as an overly-saturated market of ESG terms largely undermines the integrity of the funds that are genuinely trying to deliver social good.
The FCA’s package promotes the consumer understanding of ESG and has called for full transparency on how products are achieving ESG initiatives, or how they might not.
To implement this level of transparency, the package has suggested that investment products be clearly labelled.
The regulator has put forward three categories for labels to mark this differentiation.
The first would be ‘sustainable focus’, for products investing in assets that are environmentally or socially sustainable, followed by ‘sustainable improvers’, for products investing in assets to improve environmental or social sustainability over time.
The third proposed label would be ‘sustainable impact’, for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact.
The use of these labels is to be accompanied by restrictions on how popular terms like ‘ESG’, ‘green’ and ‘sustainable’ are used; specifically within the promotion of products that do not meet the criteria requiring them to be labelled.
The proposal emphasises how consumers must be able to clearly understand how a fund related to ESG, including disclosing investments that a consumer may not expect to be held in the product.
“Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable, that they actually are,” Sacha Sadan, the FCA’s director of ESG said in the official statement.
“Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges.
“This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”
The FCA’s consultation on this matter is expected to remain open until 25 January 2023, while the regulator has confirmed that it intends to publish the final rules by the end of the first half of 2023.
The industry’s response
“The proposals are a necessary and positive intervention in the market for green and sustainable financial products,” said Becky O’Connor, head of pensions and savings at interactive investor.
“Investors who want to make their money make a difference need to be able to trust that the investment they are buying actually does what it says on the tin,” continues O’Connor.
“With so many different and often conflicting rating systems and definitions currently floating around, it can be hard to know what investments are truly helping the planet and easy to lose faith in the whole idea of sustainable investment.
“The FCA’s measures should go a long way to restoring faith and eliminating exaggerated and downright misleading marketing of financial products. Moves towards official definitions and labels are a welcome development.”
“We welcome the regulator’s efforts to bring some clarity to the growing number and wide variety of responsible investment funds,” added Emma Wall, head of investment analysis and research at Hargreaves Lansdown.
Wall explains how confusing terminology can stop potential investors from selecting the right funds for them, for their personal wealth goals and ethical priorities.
“Flows into responsible investment funds have held up well against a challenging market backdrop this year, but with this popularity comes the risk of greenwashing,” she continues.
“Greater clarity and terminology homogeny within the sector, alongside a crackdown on greenwashing, will help drive better outcomes for investors as well as the planet and society.
“It is important to get these labels right as we’ll be working with them for years to come and so we look forward to exploring the proposals in more detail considering how they will assist clients in making sustainable choices.”
Melville Rodrigues, head of real estate advisory at the financial services provider Apex Group, welcomes the FCA’s proposals as an “ESG regulatory game-changer” for UK fund managers and their investors.
He suggests that the products’ labels could be attractive to, and adopted by fund managers and investors elsewhere.
“We may well see the market voluntarily use these labels well ahead of the FCA finalising sustainability disclosure requirements (SDR) next year,” Rodrigues explains.
“These are neat labels which are suitable for retail as well as institutional investors, capable of being mapped to SFDR disclosure requirements and, in the US, the SEC’s recent proposals on disclosures, and reinforce the crucial anti-greenwashing principle.”
“In a real estate context, such labels could be applied to reflect different stages of an asset’s life cycle,” continues Rodrigues.
“This will be useful, for example, for funds with stranded assets but which are transitioning to ‘green’ and encourage such transition strategies.
“Such strategies have an important contribution in progressing the net zero agenda,” he concludes.
“Concerns have been apparent in the market for some time that products labelled as ‘green’ or ‘sustainable’ in fact had ESG credentials that were questionable at best, driven in large part by the lack of regulation in this area,” adds RPC partner Chris Ross, who specialises in commercial, banking and fraud disputes.
“The FCA’s intervention is, therefore, a welcome step forward in this area in clarifying how firms should label their products.
“To what extent consumers and investors are prepared to prioritise genuinely ESG-compliant products over more traditional investments that may offer higher returns remains to be seen.”
Anthony Baker, founder and CEO of Satellite Vu, explains how greenwashing misleads customers, detracting from products and solutions that are genuinely making a positive impact on the planet.
“The FCA ought to be commended for proposing new rules and initiatives to identify truly sustainable investment to solve global challenges around ESG-labelled instruments,” comments Baker.
“‘ESG’, ‘green’ and ‘sustainable’ have become buzzwords for net zero activities and subsequently, some organisations have jumped on the opportunity to appear to be doing good.
“In reality, their activities aren’t well defined and rarely provide a tangible impact.”
“Categorising sustainability language is important and the challenge we face is that of measuring global climate impact across multiple and varied investment portfolios,” he concludes.