03 Aug 2023

Are your investments really green? The FCA takes on greenwashing

The FCA is introducing an industry-wide system to help identify environmentally-friendly investments, but it’s proving tough to navigate the requirements.

Max Kretschmer

If you were born before 2000, you might remember Sainsbury’s introducing a “traffic light” system to communicate the nutritional content of its food. This simple red, amber, green graphic changed the shopping experience. Health-conscious consumers no longer had to decode an ingredients label to work out whether the 13.7g of saturated fat in a Cornish pasty was aligned to their dietary needs.  

The Financial Conduct Authority (FCA) has embarked on a similar project to demystify green credentials in the Financial Services sector. The idea is simple: a reliable environmental labelling system across the UK’s financial sector. The initiative aims to support the UK’s attempt to become a centre of sustainable investment by combatting ‘greenwashing’ – the practice of marketing products as ‘green’ without actually reducing their environmental impact.  

Like food shopping in the 90s, investors today cannot always be clear whether the products they are purchasing are – from an environmental point of view – “healthy”. Accusations of greenwashing have risen in recent years and asset managers are facing increasing scrutiny for misleading investors with unsubstantiated ESG claims. 

As part of the FCA’s wider ESG strategy, Sustainability Disclosure Requirements (SDRs) are designed to improve transparency, and require firms to clearly communicate the sustainability-related features of investment products. In turn, products will receive one of three labels, denoting the extent of their environmental impact. 

Truly green investment products will get a “sustainable impact label; middling products receive “sustainable focus” or “sustainable improvers; and those that do not meet the FCA’s criteria receive no label. Only labelled funds will be permitted to use words such as “sustainable”, “ESG”, “Impact”, “responsible”,green”, Sustainable Development Goals (SDG) or “Paris-aligned”.  

Environmentally-conscious investors can look forward to traffic-light style clarity. A trusted FCA label would cut through opaque claims and confusing classifications, reassuring the growing numbers of investors who value products with sustainable attributes.  

However, the implementation of the FCA’s new system has faced challenges. On 20th March the regulatory body issued “Dear CEO” letters to benchmark administrators (those in charge of disclosing the ESG credentials of investment products), warning them that they had failed to meet the FCA’s methodological guidelines.  

For labels to have value, firms must adopt detail-rich, standardised methodologies. Implementing this across a varied sector, with different interpretations of what exactly constitutes ESG, is no easy feat. Despite broad support for the FCA’s proposals, many firms are simply not nimble enough to immediately meet the requirements.  

On 29th March the FCA announced it would fall short of plans to have the final rules ready by June, moving publication of the instructive policy statement into Q3. Q3 has arrived, and so has another deferral. On 17th July, the FCA issued a further update, this time pushing the policy statement into Q4.  The ‘range of comments’ from the January consultation period was given as the reason for delay. A hefty 240 responses came in, seemingly clogging up the FCA’s policy pipeline. Criticisms range from accusations that SDR’s “sustainable improvers” label isn’t stringent enough, to concerns that the regime is prohibitively rigorous, exempting the majority of UK funds.  

The FCA’s ESG Chief, Sacha Sanda, warned SDRs would flush out some two thirds of the products currently labelled as ESG friendly, if applied to the market in their current state. The disclosure and labelling system is ambitious, and its eventual implementation is not going to be smooth, but consequential policy reforms never are. After a lengthy consultation, and a protracted period of policy development, firms should not expect the FCA to pull any punches when implementation begins.  

The faster that firms can adapt, the better. A reliable ESG labelling regime would drive the UK’s Green Finance Strategy, enabling London to cement itself at the centre of sustainable investment. With sustainable funds worth $2.8 trillion and counting, it would pay for the UK to be like Sainsbury’s.  

*The FCA is a client of MHP Group

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