This article is from the new Good Guide to Avoiding Greenwash, available to download FREE here.
Most of us are now well aware of the potentially existential risks presented by climate change and the damage we have caused to nature – and care about the interconnected social challenges, too.
But while many people have worked out that big businesses are all too often part of the problem, far fewer equate these with their own pensions, ISAs and bank accounts – unless, of course, they’re reading a publication such as this!
And those who are aware have all too often felt shortchanged by financial products claiming to be ‘sustainable’, ‘responsible’, ‘ESG’ or ‘ethical’ over recent years.
Looking at investing in particular, there are many great funds that make a meaningful positive impact on people and the planet. But all too often, investment funds have confused or fallen short of their clients’ reasonable expectations by making lofty, vague and unsubstantiated claims.
These are, in brief, the issues the Financial Conduct Authority (FCA)’s new ‘Sustainability Disclosure Requirements’ and labelling regime (SDR) aim to address.
The first regulatory change is the new anti-greenwash rule, which came in on May 31 and aims to end the over-exaggeration of sustainability credentials. This applies to all financial products offered by any UK FCA-regulated firm – from investment, to pensions, to banking and more.
The second, from July 31, will be the introduction of a fund labelling regime that aims to differentiate between funds that clearly have the intention of supporting and encouraging positive change – and those that do not. There will be four new labelling options, to allow for different sustainable fund strategies.
Newly labelled funds will be allowed, for example, to put different levels of emphasis on investing in assets that meet predefined sustainability standards, assets that could realistically and usefully be ‘improved,’ and strategies that make impact-related claims.
In order to avoid confusion, there will be new rules for both labelled and unlabelled funds. These include requirements to ensure fund names, marketing messages and disclosures are appropriate and not misleading – both before and after someone has made an investment.
Get the Good Guide to Avoiding Greenwash
The new rules are principles based, which means they can be applied to a wide range of investment strategies that focus on different aspects of the sustainability puzzle. But they will also have teeth.
It is early days, however. Some parts of the SDR are yet to be finalised and other elements will take a while to come into effect. The new rules are not a magic wand. They won’t move markets or deliver a fair, just, and swift transition overnight – but they are, in my view, an important step in the right direction.
They are setting foundations from which we hope to improve trust in sustainable financial products, and facilitate greater investment into assets that can help solve problems, and build – sometimes literally – a cleaner, safer future.
Risk warning: when you invest, your capital is at risk.
