FCA proposes rules to stamp out greenwashing

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FCA proposes rules to stamp out greenwashing
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In a consultation paper, published today (October 25), the regulator is looking to introduce new rules around sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.

“There are growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products; claims that don’t stand up to closer scrutiny (so-called ‘greenwashing’)," the FCA said.

“Already today, greenwashing may be eroding trust in the market for sustainable investment products. Trust and integrity in these products are important to the transition to a more sustainable future.”

The new rules include restrictions on how investment managers use terms such as “green”, “ESG” or “sustainable” for products. 

The FCA said the measures are among several potential new rules which will protect consumers and improve trust in sustainable investment products. 

It is proposing to introduce a number of new rules including using a set of three fund labels to distinguish types of sustainable investment products.

There will be three categories: sustainable focus - for products investing in assets that are environmentally or socially sustainability, sustainable improvers - for products investing in assets to improve the environmental or social sustainability over time, and sustainable impact - for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact. 

Other proposed rules include:

  • Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which don’t qualify for the sustainable investment labels. It is also proposing a more general anti-greenwashing rule covering all regulated firms.
  • Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product.
  • More detailed disclosures, suitable for institutional investors or retail investors that want to know more.
  • Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.

Elsewhere, the FCA said it is exploring how to introduce rules for financial advisers so they take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. 

The City watchdog said it intends to follow with a separate consultation on this in due course. 

Sacha Sadan, director of ESG at the FCA, said: “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. 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 consultation is open until January 25, 2023 and the regulator said it intends to publish final rules by the end of the first half of 2023.

Implementation deadline

The City watchdog said this consultation paper will be of interest to all FCA-regulated firms, as it is proposing to introduce a general ‘anti-greenwashing’ rules that will apply to all firms. 

“The core elements of the regime – labelling and classification, disclosure and naming and marketing rules – will apply to asset managers initially,” it said.

“However, we are seeking views on expanding the regime to FCA-regulated asset owners in respect of their investment products. 

“We are also proposing targeted rules for the distributors of investment products to retail investors in the UK.”

The FCA said the anti-greenwashing rule will require firms to implement it immediately on publication of the policy statement which has a provisional date of June 30, 2023.

Firms that are distributors of in-scope products to retail investors, including platforms and advisers, will all have 12 months after the policy statement. 

For the naming and marketing rules, there will be two deadlines. These are 12 months after the date of the policy statement (provisionally June 30, 2024) and 18 months after publication (December 30, 2024).

Firms that are providing portfolio management arrangements will be exempt from the naming and marketing rules when 90 per cent or more of the value of constituent products qualify for any label.

In a nine-page letter last year, Nick Miller, head of the FCA’s asset management supervision department, said the regulator had seen a high volume of applications for the authorisation of funds with an ESG focus.

At the time, it said applications for ESG funds must improve as it outlined guiding principles for the products.

Miller said although the FCA welcomed innovation within the sustainable investment market, it recognised that “innovation and the rapid pace of change present the industry with challenges”, such as around ESG-related data and metrics. 

He added: “Against this backdrop, we are concerned by the number of poor-quality fund applications we have seen and the impact this may have on consumers. This must improve.” 

sonia.rach@ft.com

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