The Financial Conduct Authority has confirmed that it will forge ahead with a raft of new measures to boost trust and transparency around sustainable investment products and tackle greenwashing.
With an estimated $18.4 trillion of ESG-orientated assets now being managed globally, the watchdog said its new measures will help consumers to make more informed decisions when investing and enhance the credibility of the sustainable investment market.
It follows research that has shown that investors were not confident that sustainability-related claims made about investments were genuine.
As part of its package, the FCA will introduce an anti-greenwashing rule for all authorised firms, four investment labels and new guidance for the naming and marketing of investment funds.
Funds will be able to use the following labels depending on their approach:
• Sustainability Impact – at least 70% of portfolio invested to achieve a pre-defined measurable positive impact.
• Sustainability Focus – at least 70% of portfolio invested in assets that meet a standard of environmentally or social sustainability.
• Sustainability Improvers – at least 70% of portfolio invested in assets that have the potential to become more environmentally or socially sustainable over time.
• Sustainability Mixed Goals – at 70% invested across a combination of assets aligned with the above three categories. The FCA said this fourth table was added after industry feedback.
The FCA said the labels will provide investors with a better understanding of what their money is being used for. However, they are not intended to provide any endorsement of a product’s suitability for an investor.
The labelling regime will come into force on 31 July 2024. This will follow anti-greenwashing rules coming in May 2024, and the naming and marketing rules will apply from 2 December 2024.
Sacha Sadan, director of environmental, social and governance at the FCA said: “We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity.”
The new anti-greenwashing rule will ensure that sustainability-related claims made by firms are “fair, clear and not misleading”, the FCA said.
Richard Stone, chief executive of the Association of Investment Companies, showed support for the move: “The anti-greenwashing rule is a much needed intervention by the FCA to crack down on rogue ESG claims. Our ESG Attitudes Tracker shows that investor concerns about greenwashing have increased markedly over the past two years and there are now more investors who don’t trust sustainability claims than those who do. The new rules are an important step towards reversing the worrying trend.”
He added: “We fully support the objective of restoring investors’ confidence in sustainable investments. An effective labelling regime will help investors find their way to investments that align with their values, as well as supporting the development of funds that have a genuine environmental or social impact.”
The FCA said new naming and marketing requirements will also be introduced to ensure that products cannot be described as having a positive impact on sustainability if they do not.
The new measures were welcomed within the financial advice industry, with Gemma Woodward, head of responsible investment at Quilter Cheviot, stating that the “landmark” regulation has the potential to alter the sustainable investment landscape in the UK.
“The introduction of an additional label, ‘sustainability mixed goals’, to go along with the original three proposed is an important one. This is vital for those funds investing across the spectrum of assets and allows the FCA to bring fund of funds into scope too. This is a positive for investors as it opens up a wider range of options available to them if they do wish to invest in this way.”
Woodward said there are areas that will take “additional navigating and clarification” as the industry evolves, particularly around the marketing of products and words the industry will be able to use to describe non-labelled products and funds.
“It would be a shame if this results in green-hushing – the concept of underplaying the responsible or sustainable investment credentials – a phenomenon we already see in some US based managers. That said, it is clear that the FCA wants to set a high standard with this regulation.”
Woodward said that while the 70% threshold of assets invested in line with the sustainability objective was viewed as too steep by some, a high percentage is needed to help avoid any greenwashing accusations. However, Woodward said the figure will need monitoring going forward to allow tweaks should 70% “appear too restrictive, especially for those in more defensive strategies where cash and bonds can be harder to classify as sustainable.”
Woodward added: “While the vast majority of this regulation applies to asset managers and fund providers, advisers cannot simply ignore its impact. It is pleasing to see the FCA has considered the communication aspects of these labels for advisers to clients, and that it intends to work collaboratively with the adviser community to build on SDR in the distribution chain.
“But while the advice process remains as it is today, it won’t be long until changes around sustainable investment will be required. Ignoring it now is simply kicking the can down the road. SDR is a good starting point for advisers to build on and be proactive in an area that the FCA is clearly watching closely.”
Dominic Rowles, lead ESG analyst at Hargreaves Lansdown, commented: “The final shape of the regulation will make it easier for retail investors to find funds that align with their desired approach to sustainability. The policy paper unveiled is the result of a collaborative effort between the regulator and industry, with the goal of establishing a pioneering regulatory framework. We look forward to continuing to work with the regulator and the broader industry to make sustainable investing more accessible to retail investors.”
