The UK Financial Conduct Authority (FCA) is designing its forthcoming sustainability disclosure requirements (SDRs) to discourage greenwashing and the mislabelling of investment funds as green.
- The UK FCA is paying close attention to the mislabelling of green funds in developing its SDRs.
- The mis-selling of unsuitable products is an example of serious misconduct, which could prompt the FCA to take proactive steps to remedy harm or impose sanctions.
- The SDRs will be based on TCFD recommendations and also be consistent with international sustainability standards from the ISSB, as well as the EU’s SFDR, supporting the UK’s ambition to be a global financial centre.
The FCA is determined that the framework and guidelines will be clear enough to prevent incidents of greenwashing. The new standards will prevent non-compliant funds from being able to use the green label. Long term the goal is to protect investors and minimise corrective actions.
Developing the SDRs in conjunction with international standards bodies also helps ensure they are applicable globally, easing participation in the UK financial markets by foreign firms.
Greenwashing an important consideration in developing disclosure requirements
Concerns over mislabelling financial products as green are driving a big part of the FCA’s considerations in developing its SDRs. Greenwashing was cited as a major concern in the government’s Greening Finance: A roadmap to sustainable investing report.
The report warns that greenwashing is a major concern for investors, based on Schroders research. The FCA also said that sustainability claims from many ESG-themed funds did not stand up to scrutiny when submitted for review.
Recently Sacha Sadan, ESG Director at the FCA doubled down on an October 2021 statement saying: “We don’t want greenwashing in the industry because that will affect the whole industry as well, and I think a lot of our financial peers are also looking at this and I think it’s really important we start putting these sort of labels and protections in place as early as possible. “
In his keynote address at the ESG Risk and Investment Asia 2022 conference, Mr. Sadan added the UK did not want to work in isolation, and is collaborating with the International Sustainability Standards Board (ISSB) and the International Organisation of Securities Commissions (IOSCO) in developing the SDRs.
Ensuring a global approach supports UK’s global finance ambitions
In addition to the ISSB and IOSCO, the FCA’s guidelines will also be informed by the EU’s sustainable finance disclosure regulation (SFDR), and proposals by the US securities and exchange commission (SEC).
A mandatory requirement to provide disclosures aligned with recommendations from the task force on climate-related financial disclosures (TCFD) was enshrined into UK law in April 2022, impacting 1,300 of the largest UK-registered companies and financial institutions.
The SDRs build on the TCFD reporting requirement, and cover three types of disclosure which are:
Corporate disclosure – a new requirement for companies, including the financial services sector, these will follow ISSB standards, and the new UK green taxonomy.
Asset manager and asset owner disclosure – disclosing how these entities take sustainability into account will help consumers if their assets are being managed according to their own sustainability preferences.
Investment products disclosure – required reporting on the sustainability impacts of financial products, this will facilitate consumers’ investment decision making.
The UK green taxonomy will complement the FCA’s work
The UK green taxonomy will draw on its participation in the development of the EU’s own efforts, which it did as a former Member State. Similar to the EU approach, the taxonomy will form the basis for the UK SDRs.
The government wants to build a taxonomy that is objective and science based, accessible and not burdensome, and built to support a global transition, which again supports the UK’s ambition to become a global financial centre.