The Financial Conduct Authority is seeking to introduce a package of measures aimed at clamping down on greenwashing, with restrictions on how terms such as ‘ESG’, ‘green’ and ‘sustainable’ can be used.
In a consultation paper, the Watchdog said the measures are among several potential new rules designed to protect consumers and improve trust in sustainable investment products.
There has been a growth in the number of investment products marketed as ‘green’ or making wider sustainability claims but these unsubstantiated and misleading claims damage confidence in the sector, the FCA warned.
Sacha Sadan, director of environment social and governance at the FCA, said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers 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. 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 is proposing to introduce sustainable investment product labels that will give consumers the confidence to choose the right products for them. There will be three categories, including ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact.’ There will be no hierarchy between the proposed labels, with each designed to deliver a different profile of assets and consumer preferences.
Restrictions on how certain sustainability-related terms can be used in product names and marketing for products which don’t qualify for the sustainable investment labels will also be introduced. Instead, the FCA is proposing a more general anti-greenwashing rule covering all regulated firms.
Other proposals include consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product and more detailed disclosures for institutional investors or retail investors that want to know more.
Investment platforms and product providers will also be required to ensure that labels and disclosures are easily accessible to consumers.
The FCA is calling for industry feedback and said it intends to set out its final rules by the end of the first half of 2023.
The FCA’s proposals were welcomed by industry commentators.
Jeffrey Mushens, technical policy director at TISA, said ESG ratings are “only effective” if they are consistent and comparable.
“We are very pleased to see the FCA take the next step in making ESG reporting accessible and based on objective comparable disclosures. Financial services providers are increasingly aware of their responsibilities to prove their sustainability and ESG credentials.
“Consumers are ever more conscientious about where their money is invested and how ethical and sustainable the products and services are that they use. ESG ratings are used to assess a company’s resilience to long-term, material ESG risks. We, therefore, welcome the FCA’s proposed rules to tackle greenwashing and are looking forward to, with our groups, working with the FCA on a constructive response to this important consultation paper.”
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said: “We welcome the regulator’s efforts to bring some clarity to the growing number and wide variety of responsible investment funds. We know that 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.
“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 choice.”
Beth Lloyd, head of responsible wealth management strategy at Quilter, called the proposals an “important step forward” to helping consumers with the necessary protections and boundaries.
Lloyd said the “lazy labelling” of investment products as ‘ESG’ had not been helpful and has caused increasing confusion both to consumers and across the industry.
“Having clear definitions to adhere to and refer back to will not only help facilitate better understanding but also result in better outcomes as expectations and reality are more likely to be aligned. This remains an incredibly complex area with a huge amount of terminology and jargon for people to get their heads around. As such, it is important that disclosure is made as simple as possible and we welcome the regulator’s efforts to contribute to that.”
However, Lloyd said there was still more to come from the FCA.
“The FCA has said it will consult on the role financial advice has to play in this. This is a fundamentally important next step as it is vital we see consistency across the value chain. The FCA has been clear on its intentions and how information should be presented to the end consumer. However, this will not be a substitute for proper research, interrogation and direct discussions with the end-client as such financial advisers and investment managers are going to play a crucial role here,” she added.
Kate Elliot, head of Ethical, Sustainable and Impact Research at Rathbone Greenbank Investments, like wise welcomed the move, saying the changes “should bring clarity to the marketplace”.
She added: “Dropping the ‘responsible’ category that was included in the previous discussion paper helps focus the labels on products that are genuinely addressing sustainability challenges.”
With respect to the ‘sustainable improvers’ category (which covers investment products that invest in assets that may not be sustainable today, with a view to improving their performance over time), Elliot said: “It is good to see that asset managers will be required to explain the targets they have in place for improvement in sustainability performance and how they are involved in supporting this, for example through stewardship and engagement activity. This will prevent asset managers dressing up ‘business as usual’ strategies as sustainable, because they will be required to explain how they are supporting the transition rather than passively following it.”
Recent AIC research showed that 58% of investors surveyed are not convinced by ESG claims from funds, up from 48% last year. Investors who do not consider ESG criteria are particularly cynical, with 55% saying they are not convinced by ESG claims from asset managers which doubled from 27% last year.
Richard Stone, chief executive of the AIC, commented: “We support the proposed simplification of the investment labels down to three main categories which will ensure the regime will work effectively for consumers. It’s encouraging that the ‘sustainable focus’ label sets a high threshold, namely 70% investment into environmental and social sustainability projects.
“The ‘sustainable impact’ label is especially welcome as investment companies are particularly suitable for these investments. They provide permanent capital and are able to invest in hard-to-sell assets like renewable energy infrastructure and accommodation for vulnerable people.”
