In a bid to clamp down on greenwashing, the Financial Conduct Authority (FCA) is proposing a package of new measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used.
Sacha Sadan, the FCA’s Director of Environment Social and Governance, said: “Greenwashing misleads consumers and erodes trust in all ESG products. 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.”
New measures include investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. The proposal is part of the FCA’s efforts to build trust and integrity in ESG-labelled instruments, products and the supporting ecosystem. The FCA wants to tackle exaggerated, misleading or unsubstantiated claims about ESG credentials. The FCA’s initiative follows recent growth in the number of investment products marketed as ‘green’ or making wider sustainability claims, many of which are found to be exaggerated, misleading or unsubstantiated claims about ESG credentials.
The FCA's proposals seem highly logical. For the product providers, the challenges should be palatable:
The Sustainability Disclosure Requirements (SDR) and investment labels publication advocates that product providers can integrate ESG issues as much as they want, but if they want to market their fund as sustainable, it's got to link to outcomes and they’ve got to explain how.
Product providers shouldn’t just talk about the company's existing sustainability activities, but they should voice their role as an investor, i.e., "additionality".
The FCA cites three ways to influence: Sustainability focus (cost of capital), Sustainability improvers (stewardship), and Sustainability impact (financing solutions). For improvers, product providers must set stewardship targets, the activities undertaken to meet the target and so forth. For impact, product providers must set KPIs and undertake impact measurement.
The FCA outlines limit use of associated terms “Green” and “ESG” in fund labelling and marketing. Restrictions on how certain sustainability-related terms can be used in product names and marketing for products which don’t qualify for the sustainable investment labels. The FCA is also proposing a more general anti-greenwashing rule covering all regulated firms. Consumer-facing disclosures will be introduced to help consumers understand the key sustainability-related features of an investment product including disclosing investments that a consumer may not expect to be held in the product. More detailed disclosures, suitable for institutional investors or retail investors that want to know more. The FCA also will introduce requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
The FCA is also doubling down on its supervisory engagement on sustainable finance as well as enhancing its enforcement strategy.
Industry participants are invited to respond to the questions in their Consultation Paper by 25 January 2023. Subject to the feedback received, they intend to publish their final rules and guidance in a Policy Statement by the end of the first half of 2023.
Investors are increasingly building out their own ESG and Sustainability research, analysis and risk control functions to dive deeper into the types of insights our processes uncover. Trusted by more than 70 of the world’s top financial institutions, Bitvore provides the precision intelligence capabilities top firms need to counter risks and drive efficiencies with power of data-driven decision making.
Our clients uncover rich streams of risk and ESG insights from unstructured data that act as the perfect complement to internal data and insights your firm is already generating. Our artificial intelligence and machine learning powered system provides the ability to see further, respond faster, and capitalize more effectively.
Get in touch today to learn how the Bitvore solutions can help your organization at www.bitvore.com.