Exaggerated, misleading or unsubstantiated claims are undermining trust in ESG-related products, and UK regulator the Financial Conduct Authority (FCA) aims to crack down.
With more companies are claiming to be green, the FCA is to implement new sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ are used in order to protect customers from misleading or false advertising.
Tackling greenwashing is now a core regulatory priority for the FCA in helping the UK economy adapt to the transition to net zero and a more sustainable future. These new rules are set to assure customers and others that sustainability characteristics are in line with what companies and products are claiming to have.
In the FCA’s 2020 Financial Lives Survey, almost two thirds of participants said that they worry about the state of the world and felt personally responsible for making a difference. Four out of five considered environmental issues important and believed that businesses have a wider responsibility than simply to make a profit.
Keeping ESG trustworthy
These measures are a part of the commitment made earlier in the FCA’s ESG Strategy and Business Plan, with the aim to build trust and integrity in ESG-labelled instruments, products and the supporting ecosystem.
“Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are”, said Sacha Sadan, the FCA’s Director of Environment Social and Governance.
In the bid to suppress greenwashing, the FCA is proposing this package of new measures:
- Three sustainable investment product labels: Sustainable focus (for products investing in assets that are environmentally or socially sustainability); Sustainable improvers (for products investing in assets to improve the environmental or social sustainability over time, including in response to the stewardship influence of the firm); and Sustainable impact (for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact).
- Restrictions on how certain sustainability-related terms can be used to avoid misleading marketing of products which don’t qualify for the sustainable investment labels.
- Consumer-facing disclosures to help understand the key sustainability-related features of an investment product, including disclosing investments that a consumer may not expect to be held in the product.
- More detailed disclosures, suitable for institutional investors or retail investors.
- Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
Sustainable finance
“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”, said Sacha Sadan.
The FCA is also strengthening its supervisory engagement on sustainable finance and enhancing its enforcement strategy. One action includes checking how firms and authorised fund managers have responded to the expectations set out in the Dear Chair letter, issued in July 2021. Back then, ESG and sustainable investment funds were the fastest growing segment of the European funds market, according to the letter.
The consultation is open until January 25, 2023. The FCA intends to publish final rules by the end of the first half of 2023.