The Financial Conduct Authority (FCA) is proposing a package of new measures to protect consumers and improve trust in sustainable investment products.
- The FCA has proposed new rules to clamp down on greenwash practices in the financial services industry.
- There has been an increase in investment products marketed as ‘green’ or making wider sustainability claims, although some of these have been found to be exaggerated, misleading or unsubstantiated.
- Regulators across the world have made similar proposals to address greenwash, which is becoming a priority.
FCA proposes new package of rules
The UK financial watchdog is proposing a series of measures intended to protect consumers and improve trust in sustainable investment products. It is part of wider plans to build trust and integrity in ESG-labelled instruments, products and the supporting ecosystem.
The package includes establishing sustainable investment product labels across three categories underpinned by objective criteria. If some products do not qualify for the sustainable investment labels, there would be restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in their names and marketing.
Another proposed rule is imposing disclosures to help consumers understand the key features of an investment product, for instance specifying if there are any investments that may not be expected in the product. The FCA has opened a consultation closing 25 January 2023. It plans to publish the final rules by the end of the first half of 2023.
Sacha Sadan, the FCA’s director of environment social and governance, 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.”
He added: “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 risk of greenwash
The market has seen a proliferation of sustainability-focused investment products in the recent years, but lack of regulation has allowed the spread of greenwash practices. As pointed out by the FCA, exaggerated, misleading or unsubstantiated claims about ESG credentials damage consumer confidence.
For example, an October 2022 study by sustainability data and technology platform ESG Book showed that 95 climate funds were not fully aligned with the Paris Agreement’s goal. It also found that 73 ESG funds exceed the average emissions intensity ratio of ESG Book’s fund universe, which includes 30,000 mutual funds.
Researchers said that having ESG or climate-labelled funds with such a high emissions intensity ratio should raise concerns, especially when they are passive investments – meaning they do not engage with companies to influence their decarbonisation strategies.
A separate study published in Review of Accounting Studies in June 2022 found that ESG funds’ portfolio firms, on average, accounted for more carbon emissions than non-ESG funds’ portfolio firms. The authors said that ESG funds were more likely to pick stocks that voluntarily disclose emissions, suggesting that “ESG funds may be concerned about the existence of firms’ disclosures rather than the content of the information being disclosed”.
A global clampdown
Like the FCA, financial regulators of jurisdictions worldwide are tightening rules to address greenwash practices. In August 2022, the Monetary Authority of Singapore, the country’s central bank and financial regulator, unveiled new reporting and disclosure requirements for ESG funds.
The US Securities and Exchange Commission proposed new regulation in 2022, while the European Union has introduced the Sustainable Finance Disclosure Regulation framework and will start applying the regulatory technical standard from January 2023. The Australian Securities and Investment Commission released guidance on greenwash practices in June 2022.
There is more work to do to reach full transparency around sustainable investment products, but the recent clampdown suggests that greenwash is becoming a priority for financial regulators, especially amid booming market demand from ESG conscious investors.