The UK’s Financial Conduct Authority (FCA) has launched a consultation proposing the introduction of new rules designed to protect consumers, improve trust in sustainable investment products and protect UK-based funds from greenwashing.
The term refers to companies delivering false or inaccurate information about their environmentally friendly strategies or products in an attempt to capitalize on the growing demand for ESG standards. The proposed rules include three new categories of labels for products considered to be sustainable investments and a set of qualifying criteria underpinning them.
The three labels are:
- Sustainable focus – funds invested in environmental and social (E&S) sustainable assets
- Sustainable improvers – funds invested in assets that are committed to increasing their sustainability over time
- Sustainable impact – firms that develop a ‘theory of change’ and implement and measure a positive impact of their investments concerning an E&S outcome.
For companies to qualify under any of the labels, the FCA has set criteria that include funds having a clear, specific and measurable objective aligned with FCA requirements and a subsequent strategy and policy aligned with the objective.
Furthermore, firms need to have KPIs in place and apply and maintain appropriate resources, governance and arrangements compatible with the successful delivery of an E&S objective, as well as have an active investor stewardship strategy.
As part of its proposal, the FCA is also seeking to introduce consumer-facing disclosures to help institutional and retail investors get a clear view of the sustainable features of a specific investment fund.
Restrictions on ‘green’
In the statement announcing its new rules, the FCA points to the growth in the number of investment products that are marketed as green and that put forward sustainability claims around their commitment to ESG that are exaggerated, misleading or unsubstantiated.
‘Greenwashing misleads consumers and erodes trust in all ESG products,’ says Sacha Sadan, the FCA’s director of ESG. ‘Consumers must be confident when products claim to be more sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.’
The consultation will run until January 25, 2023, with the FCA aiming to publish its reviewed and final rules by the first six months of 2023. Initially focusing on UK-based funds and portfolio management, the regulator has revealed its intention to follow up with another consultation looking at overseas products.
Reinforcing the aim to set a framework that builds trust and integrity around ESG-labelled products, Sadan adds: ‘We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.’
