FCA proposes new rules to intercept greenwashing

The FCA has today (October 25 2022) proposed a package of new measures designed to tackle greenwashing in the financial sector.

Greenwashing refers to the practice whereby a company deceives stakeholders into falsely believing that it is more environmentally friendly than it really is via marketing spin.

The regulator’s statement highlighted that there has been a growth in greenwashing among investment products – some firms have exaggerated environmental, social and governance (ESG) credentials, damaging consumer’s confidence as a result.

The proposed new rules aim to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.

A consultation on the proposed new rules is open until 25 January 2023 – the FCA plans to publish its final rules by the end of H1 2023.

Sacha Sadan, director of ESG at the FCA, said: “We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”

Proposals put forward by the regulator include:

• Implementing sustainable investment product labels, in the form of three categories, underpinned by objective criteria.
• Restrictions on how sustainability-related terms such as ESG and green can be used in product names and marketing that don’t qualify for the sustainable investment labels.
• Consumer-facing disclosures to help them 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.

Ethical responsibilities

The FCA is also checking how firms have responded to the ESG strategy expectations set out in its Dear Chair letter, which was issued to fund managers in July 2021.

The work forms part of the FCA’s commitments in its ESG Strategy (3 November 2021) and Business Plan (7 April 2022).

Hargreaves Lansdown’s head of investment analysis and research Emma Wall said: “We know that confusing terminology can stop potential investors from selecting the right funds for them – for their personal wealth goals and ethical priorities.

”Flows into responsible investment funds have held up well against a challenging market backdrop this year, but with this popularity comes the risk of greenwashing.

“Greater clarity and terminology homogeny within the sector, alongside a crackdown on greenwashing, will help drive better outcomes for investors as well as the planet and society.

“It is important to get these labels right as we’ll be working with them for years to come and so we look forward to exploring the proposals in more detail considering how they will assist clients in making sustainable choices.”

Go-time

Meanwhile, Michaela Walker, European head of financial services sector at law firm Eversheds Sutherland, said: “This is only the start with the FCA stating that it will develop and expand the scope of the regime to include other products and to ensure compatibility with international standards.

“It is helpful that the FCA has sought to map against the EU and US regimes, but in practice this is not SFDR re-packaged, it is a different regime with different requirements and all funds sustainable or not will need to take action as a result.”

The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation, which came into effect in March 2021 and imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants.

James Alleyne, legal director in the financial services regulatory team at Kingsley Napley LLP, added: “Regulated firms will likely have until mid-2023 to get their house in order but would be advised to start implementing these standards as soon as possible if they want to follow best practice in sustainable investing and avoid other potential legal and regulatory consequences.”