Financial Conduct Authority set to clamp down on greenwashing

From next year, all FCA-authorised companies will be subjected to the new Sustainability Disclosure Requirements (SDR) rules, which were confirmed earlier this week following extensive consultations and research.

Asset managers will not be able to make vague references to ‘sustainability’, ‘ESG’ or related terms when marketing their funds. They must provide “clear, complete” information and choose one of four specific fund labels. They must also prove that at least 70% of the fund is allocated to support its label.

The labels are ‘Sustainability Focus’, ‘Sustainability Improvers’, ‘Sustainability Impact’ and ‘Sustainability Mixed Goals’.

The ‘Sustainability Improvers’ label could be likened to transition finance – it is intended for funds that invest in assets with the potential to improve their impact over time.

‘Sustainability Impact’ is, as one would expect, aligned with the principles of impact investing. It can be applied to funds with a “pre-defined, positive, measurable impact in relation to an environmental and/or social impact”. Asset managers are encouraged to monitor progress regularly but this is not mandated.

‘Sustainability Focus’ is somewhat broader. It can be applied to funds investing in assets already widely considered sustainable, such as renewable energy generation.

‘Sustainability Mixed Goals’ is a new label, introduced by popular request. It will be used for products that invest in accordance with a blend of the objectives for the other labels. Firms will need to identify and report on the split.

Funds using any of these labels and/or making sustainability-related claims in any marketing will need to prominently publish a summary for clients. Summaries will need to be third-party verified.

Expert insight

The FCA’s ESG director Sacha Sadan said the regime is “simple” and “easy to understand”.

Sadan added: “This is a crucial step for consumer protection as sustainable investment grows in popularity.”

The move from the FCA came as Impact Cubed revealed the results of a screening of more than 40,000 funds from across the world with ‘ESG’ in their title. Almost one-fifth (18%) were found to have a negative impact relative to their market benchmark.

Similarly, a recent Research in Finance survey of 227 discretionary fund managers and investment advisors found that six in ten are holding back from investing in ESG funds for fears over exaggerated and misleading claims and labels.

Reacting to the news, the UK Sustainable Investment and Finance Association’s (UKSIF) chief executive James Alexander said:

“This is an important moment in our industry’s efforts to build greater confidence and trust among retail investors in the UK’s evolving sustainable investing market. We believe that the new investment labels can address concerns often raised by savers over their funds’ sustainability claims and profile.

“We are pleased to see a number of important revisions to the regime to address potential implementation challenges and promote greater transparency for savers. These include refining some of the underlying criteria for the labels and the operation of the marketing rules, as well as direct recognition of the important role of multi-asset funds and blended strategies under the regime.

“Going forward, we would like to see the FCA consider convening the Disclosures and Labels Advisory Group (DLAG), or a similar industry group, on an ongoing basis to help the regime’s implementation in the market and monitor greenwashing risks. Crucially, the regulator should continue to closely engage with regulatory authorities in overseas markets to positively shape jurisdictions’ approaches to disclosures and fund labels and promote international harmonisation.”