The Financial Conduct Authority has promised to challenge firms it deems to be "greenwashing" products as it moves to protect consumers from being misled over the sustainability of their investments.
Greenwashing is a phenomenon of growing concern in the financial sector which sees funds and firms market products and investments to appear more sustainable and ethical than they really are.
In a feedback statement published today (October 16) the regulator said deterring greenwashing and ensuring consumers can assess if a product is genuinely green would remain an active area of focus in its "supervisory and policy work".
The watchdog said initial work on potential greenwashing in the sector had shown the "sustainable" label is applied to a "very wide" range of products, some of which it warned do not appear to have "materially different exposures" to products that are not marketed as sustainable.
The FCA said: "However, we acknowledge that assessing this is complex. There can be legitimate causes for differences in assessments of sustainability of products, for example sectoral or regional differences, and it can be difficult to determine the net impact of a financial product in supporting sustainability goals.
"Ultimately, our focus is on ensuring that investors and consumers are not misled or mis-sold products that fail to meet their needs."
The regulator said it was keen to clarify the expectations it set out in a policy statement published in February, which had asked funds to clarify to investors if and how they pursue environmental and social objectives and to do so in a way that is "fair, clear and not misleading".
If consumers find it difficult to validate firms' claims about the products they are being offered, the FCA warned, the products will be at risk of greenwashing.
This could then undermine confidence in the green sector, lead to unsatisfied demand and ultimately reduced participation and investment in the transition to net zero emissions, the regulator warned.
Andrew Bailey, chief executive of the FCA, said: "We have an important role to play in creating an environment where firms can manage the risks from moving to a greener economy and capture the opportunities to benefit consumers.
"This feedback statement is the next step in our drive to provide clarity for firms and consumers about how our work will help support the response to the climate challenge and the development of the green finance market."
Earlier this month industry research found investment services and platforms have broadened their support of ethical investments as more investors are opting to align their investments with their personal values.
But concerns have been raised a lack of standardised reporting methods from either ESG funds or companies allow some firms to appear compliant at the ‘headline’ level, without actually running in line with ESG principles.
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