Pension firms and asset managers could face restrictions on how they use terms like “green”, “sustainable” or “ESG” when naming and marketing funds and investments under new FCA rules, designed to a clamp down on greenwashing.
The FCA has proposed a package of measures, which also include new ‘sustainability labels’ for investment funds, in a bid to help investors understand and compare the green credentials of different products.
Publishing its proposals, the FCA pointed out there has been huge growth in the number of investment products marketed as ‘green’ or making wider sustainability claims. However, it says exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products.
The FCA is proposing to introduce:
- Sustainable investment product labels, which it says will give consumers the confidence to choose the right products for them. There will be three categories – including one for products improving their sustainability over time – underpinned by objective criteria.
- Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which don’t qualify for the sustainable investment labels.
- Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product – this includes disclosing investments that a consumer may not expect to be held in the product.
- More detailed disclosures, suitable for institutional investors or retail investors that want to know more.
- Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
These proposed new rules are subject to consultation from the industry. One of these new labels will be for a ‘sustainable focus’ – which will require funds to have at least 70 per cent of their portfolio in sustainable assets.
The other two labels will be for ‘sustainable improvers’, and ‘sustainable impact’ funds. This former will allow funds to invest in a broader range of assets, with a view of improving ESG scores over a period of time.
The FCA is also proposing an ‘anti-greenwashing’ rule, which will require sustainability-related claims to be clear, fair, and not misleading. It’s not entirely evident what this adds beyond the existing requirement for firms to ensure all consumer communications are clear, fair, and not misleading, apart from emphasising that this applies to sustainability claims too.
The FCA’s director of environment social and governance, Sacha Sadan, says: “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.”
AJ Bell head of investment analysis Laith Khalaf says: “The FCA is raising the bar for sustainable funds, after widespread concern that the ESG bandwagon was getting suspiciously overcrowded. The three new sustainable labels introduced by the regulator should help ethical investors to back their preferred investment approach. The greater regulatory hurdles to marketing a fund as sustainable should also force asset managers to start walking the walk or stop talking the talk.”
Speaking about the new regulations TISA’s technical policy director Jeffrey Mushens adds: ”Here at TISA, we know that ESG ratings are only effective if they are consistent and comparable — so 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.”
Hargreaves Lansdown’s head of investment analysis and research, Emma Wall says: “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 choices.”
Ottilia Csoti, associate at law firm Fladgate adds:”Clear new categories and labels for funds will undoubtedly be a good step towards reducing the risk of greenwashing in investments products.
“However, the proposals allow for the inclusion of coal, gas and oil investments under certain conditions which, given the relatively long lead time for these measures and the scale of the climate crisis, likely means these measures will be of limited effect in urgently directing capital flows away from investments that further the consumption of fossil fuels.”