The Financial Conduct Authority (FCA), the UK's conduct regulator for financial services firms and financial markets, unveiled a series of new proposed rules, including the introduction of investment product sustainability labels and disclosure requirements, in an effort to combat greenwashing through the exaggeration or falsification of ESG claims.
The new rules are part of the FCA's "ESG Strategy," which was unveiled last year. Among the strategy's key tenets is building trust and integrity in ESG-labeled investment instruments and products. Other initiatives aim to define the regulator's role in supporting the financial sector to drive positive change and contribute to the net zero transition.
A significant development in investor interest in ESG has led to a profusion of investment products and services labeled as 'ESG,' 'green,' and sustainable,' but without clear regulations indicating to investors the real ESG-related features, methodology, and criteria being evaluated in the funds. According to the FCA, the regulator seeks to ensure that consumers and investors can rely on sustainability claims made by companies since "exaggerated, deceptive, or unfounded statements about ESG credentials harm confidence in these products."
The FCA's initiative is part of a series of global moves by regulators to address greenwashing risk with clearer investment product labels and disclosures, including a proposal by the U.S. Securities and Exchange Commission, the EU's Sustainable Finance Disclosure Regulation (SFDR) framework, Australia's recent anti-greenwashing guidance, and Singapore's MAS' new reporting and disclosure requirements for ESG funds introduced last week.
Sacha Sadan, Director of Environment, Social, and Governance at the FCA, stated:
"Greenwashing misleads consumers and diminishes confidence in all ESG products. When a product claims to be sustainable, consumers must have confidence that it is so. Our proposed regulations will aid consumers and businesses in building trust in this industry. This encourages investment in solutions to some of the world's most significant ESG issues."
The new proposals include the introduction of criteria-based sustainable investment product label categories, including a category for products whose sustainability improves over time, and restrictions on the use of terms such as 'ESG,' 'green,' and sustainable for products that do not qualify for the sustainable investment labels. The FCA is also proposing consumer-level disclosures to aid in understanding the important sustainability-related elements of an investment product, as well as institutional or retail investor-level disclosures that are more comprehensive. The agency has recommended standards for product distributors to ensure that labels and consumer-facing information are easily accessible and understandable.
This places the United Kingdom at the forefront of sustainable investing worldwide. We are raising the bar by establishing stringent regulatory standards to protect consumers in accordance with the FCA's overall approach."
Additionally, the FCA claimed that it is intensifying its supervision of sustainable financing and upgrading its enforcement strategy. This announcement follows the publication of a letter to fund managers by the regulator last year indicating that applications for ESG-focused funds frequently fail to meet expectations, often making claims about the sustainability aspects of funds that are not supported by actual strategy or composition, and outlining a series of expectations for fund managers to ensure that ESG-related claims in applications are not misleading and accurately reflect the strategy and composition of the funds.