Comment: FCA anti-greenwashing rule

Ahead of the anti-greenwashing rule coming into force on 31 May, the FCA is supporting industry with guidance to help them meet the standard; here are the guidelines and some expert commentary

The new rule is designed to protect consumers by ensuring sustainable products and services they are sold are accurately described.

Results from the latest Financial Lives survey shows significant consumer interest in sustainable finance as 81% of adults surveyed would like their investments to do some good as well as provide a financial return. This work supports the long-term growth and competitiveness of the sector by helping businesses meet this demand and ensuring consumers who invest in sustainability-related financial products can make informed decisions.

The FCA is also consulting on extending to portfolio managers the requirements on how sustainable investments are labelled and explained, making consumer choice easier. These are firms that manage a group of investments for consumers, which can either be offered as standardised products or tailored services.

The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023. They include:
 

• product labels to help consumers understand what their money is being used for
• naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up

 
Sacha Sadan, Director of Environmental, Social and Governance, FCA, said:

‘Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment. Our good and poor practice anti-greenwashing examples will help firms market their products in the right way. We continue to work closely with the ASA and CMA to address greenwashing.

‘Consumers care about investing in products that have a positive impact on the planet and people. That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money.’
 

In response:

Carla Nunes, Managing Director in the Office of Professional Practice, Kroll  

“This FCA rule is a great step towards the protection of investors, and in particular retail investors who may not have the necessary knowledge to ascertain whether certain claims by investor managers are being misleading. Under general FCA rules, regulated asset managers and fund advisors already have the duty to communicate with customers in a fair, clear and non-misleading way. However, in recent years, as investor appetite grew for ESG and sustainability related investment products, the risk of greenwashing also increased. This can be a serious issue for investors, as they may be investing in products that aren’t meeting their desired objectives. 

“The FCA anti-greenwashing rule is trying to protect consumers of ESG financial products (i.e., investors) by requiring (with some exceptions) that an investment product carrying the label of “sustainability” has at least 70% of the gross value of the product’s assets to be invested in accordance with its stated sustainability objective. Similar rules recently finalized by ESMA in the EU and the SEC in the United States actually have a higher threshold of 80%. But the objective is similar – to protect investors from misleading “sustainability” or ESG claims. 

“The FCA also added examples to help guide regulated entities to disclose and communicate with clients in a clear and not misleading manner regarding sustainability. The transition of the global economy into a more sustainable world will require massive investments towards the green energy transition. If investor confidence in products designed to finance such a transition is shaken or put into question, capital allocation into those products will suffer. That, in turn, may have negative consequences for the planet overall and its people so this ruling is a great step in the right direction.” 

Angela Hultberg, Global Sustainability Director, Kearney:

 “As consumers become more environmentally conscious, there is a growing temptation for companies to make misleading claims about their ESG credentials and engage in rhetoric that  exaggerates  their actual impact. Meanwhile, other companies are guilty of launching sustainability projects or product lines in an effort to distract from the less environmentally aspects of their work. Today’s long-awaited regulation should help curb these widespread issues.

“While the general public is already getting better at identifying misleading claims, as reflected by the rising number of civil society actions on this issue, today’s legislation should mean that in the future, they won’t have to. When combined with the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, the regulation coming into force today will be a big step towards full transparency on sustainability practices. 

“It’s high time firms move beyond merely making their products and services sound environmentally friendly to genuinely creating sustainable solutions. Climate change is a critical issue that requires action now, and as consumers become even more environmentally conscious, transparency will be essential. Under the new guidance, companies will have to make evidence-based product labels that clearly explain to consumers what their money is being used for. This will build further trust with consumers, allowing them to make more informed choices, and to have a genuinely positive impact on our planet”