The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, unveiled a series of new proposed rules today, including the introduction of investment product sustainability labels and disclosure requirements, in a bid to clamp down on greenwashing through the exaggeration or misrepresentation of ESG claims.
The new rules form part of the FCA’s “ESG Strategy,” launched last year, which included building trust and integrity in ESG-labelled investment instruments and products as one of its key themes, alongside other initiatives aimed at setting out the regulator’s role in supporting the financial sector to drive positive change and contribute to the net zero transition.
The rules come as investor interest in ESG has undergone significant growth, driving a proliferation of investment products and services marketed as ’ESG,’ ‘green’ or ‘sustainable, .’ but without clear rules communicating to investors the actual ESG-related attributes, methodologies and criteria that are being considered in the funds. According to the FCA, the regulator is looking to ensure that consumers and investors can trust products that make sustainability claims, as “exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products.”
The FCA’s initiative forms part of a series of moves by regulators globally to address greenwashing risk with clearer investment product labels and disclosures, including a proposal by the U.S.’ SEC, the EU’s Sustainable Finance Disclosure Regulation (SFDR) framework, Australia’s recent anti-greenwashing guidance, and Singapore’s MAS’ new reporting and disclosure requirements for ESG funds introduced last week.
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. 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.”
The new proposals include the introduction of criteria-based sustainable investment product label categories, including a category for products improving their sustainability over time, and restrictions on the use of terms such as ‘ESG’, ‘green’ or ‘sustainable’ for products that do not qualify for the sustainable investment labels. The FCA is also proposing disclosures at the consumer level to help understand the key sustainability-related features of an investment product, and more detailed disclosures targeted at institutional investors or retail investors. For distributors of products, the regulator has proposed requirements to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
“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 FCA also stated that it is stepping up its supervisory engagement on sustainable finance and enhancing its enforcement strategy. This announcement follows the publication of a letter to fund managers last year by the regulator indicating that applications for ESG-focused funds are frequently not meeting expectations, often making assertions about the sustainability aspects of funds not backed up by actual strategy or composition, and outlining a series expectations for fund managers in order to ensure that ESG-related claims in applications are not misleading and appropriately reflect the strategy and composition of the funds.