Tough new rules to crack down on the greenwashing of investment products have been laid out by the UK’s financial regulator.
The raft of new measures includes a new set of consumer-friendly ‘sustainability labels’ on investment products and tighter restrictions on how terms such as “ESG” (environmental, social and governance issues), “green” and “sustainable” can be used.
The Financial Conduct Authority (FCA) says the growth of “exaggerated, misleading or unsubstantiated” claims made about the sustainability credentials of investments is damaging consumer confidence and could hinder transition to a net-zero economy.
FCA Director of ESG Sacha Sadan said the new rules would “raise the bar” by setting robust regulatory standards that place the UK “at the forefront of sustainable investment internationally”.
He added: “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.”
Three categories of sustainable investment product labels are to be introduced under the proposals.
- Sustainable focus – for products investing in assets that are environmentally or socially sustainable
- Sustainable improvers – for products investing in assets to improve the environmental or social sustainability over time
- Sustainable impact – for products investing in solutions to environmental or social problems targeting measurable impact
Funds that do not fit the criteria for these labels will face limits on using green terminology such as net zero in their names or marketing materials. Firms will have until 30 June 2024 to update their product material and marketing.
Strategies that simply ‘consider ESG’ as part of their investment approach do not meet the new standards of what can be considered sustainable.
Investments in fossil fuels including coal, oil and natural gas, as well as nuclear power, will not be excluded under the FCA’s proposed rules but the regulator says managers will have to provide clear explanations of how these assets are suitable investments for sustainable funds.
The FCA also proposes a general “anti-greenwashing rule” for all regulated firms to stamp out misleading claims.
Other measures would require up-front disclosure of investment products’ sustainability features to retail and institutional investors, including elements that consumers may not expect to be part of a product.
The FCA said such details can often be “buried” in documents, with “excessive” costs associated with searching for and understanding relevant information.
Tighter demands would also be imposed on investment platforms to make sustainability information more accessible.
The FCA plans to bring the rules into force in the middle of 2023. The regulator will then give existing funds a year to comply, while new funds will have to meet the updated standards to be approved. The regulator says it will be beefing up its enforcement strategy and checking how firms have responded to the expectations set out.
The new rules come shortly after the UK advertising watchdog, the Advertising Standards Authority, rebuked HSBC for adverts that it judged to be misleading about the bank’s green credentials because they did not mention HSBC’s financing of fossil fuel projects and links to deforestation.