The City watchdog is poised to clampdown on the use of terms like ‘ESG’ and ‘green’ by asset managers as it revealed new rules today designed to stamp out rampant greenwashing in the investment industry.
The Financial Conduct Authority said this morning that a package of new measures would be rolled out to firms as it looks to protect consumers from misleading investments and restore trust in the veracity of green finance products.
Fears have grown over the lack of standards around environmental, social and governance (ESG) investment and green investment products in recent years amid claims the labels have been “hijacked” by marketeers to scoop up easy cash from unwitting investors.
The new set of measures will include sustainable investment product labels – which the regulator said would be underpinned by “objective criteria” – as well as restrictions on how certain sustainability-related terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used in product names and marketing.
The FCA warned in its proposals this morning that while the number of sustainable products had boomed, “exaggerated, misleading or unsubstantiated claims” had damaged confidence in the products.
“Consumers must be confident when products claim to be sustainable that they actually are,” said the FCA’s ESG head Sacha Sadan. “Our proposed rules will help consumers and firms build trust in this sector.”
Sadan added that the set of rules put the FCA “at the forefront of sustainable investment internationally”.
The new set of measures are a push towards clarity for consumers on ESG and mark a change in tack from the regulator’s international counterparts, who have focused more closely on disclosure requirements on the part of firms.
The watchdog said however that it would also require more detailed disclosures from investors which will provide a further level of detail for “institutional investors or retail investors that want to know more”.
Regulated firms will have until mid-2023 before the FCA’s begins swooping with enforcement action on firms who are misleading customers with wrongly labelled products.
The move was welcomed in the City today as the investment industry hailed it as an important step to regaining trust.
“Greenwashing has been consistently cited as a major challenge to the integrity, trust and growth of sustainable investment in the UK,” said James Alexander, chief of the UK Sustainable Investment and Finance Association.
“This will boost investor confidence at this crucial time for tackling global environmental and social challenges,” he added.
International alignment will be the crux
Writes Charlie Conchie
Despite a vague ESG consensus taking hold of Western economies in the past three years, the regulatory structures and framework binding it remains fundamentally fragmented.
Regulators in the UK have broadly been at the forefront of setting standards on ESG and climate action and have stormed ahead of US counterparts on holding firms to account. Indeed, the FCA was the first watchdog to roll out mandatory climate reporting for big listed firms and asset managers last year.
But as one MP pondered yesterday when quizzing the UN Special Envoy on Climate Action and Finance, Mark Carney, is this firm action placing the UK firms at a disadvantage? And will the FCA’s fresh clampdown on terms like ESG and Green dissuade funds from domiciling here?
The optimists’ answer is no. The UK has set the agenda on financial climate regulation and in forging ahead with these measures, it is trying to set a benchmark for others to follow.
And indeed that is already in motion. City A.M. understands the measures have already been shared with the International Sustainability Standards Board in the hope that international regulators will fall in line behind them.
Firms will also have until mid-2023 before a clampdown on mislabelling, allaying fears that funds will shun the UK as home or be punished in the immediate term.
Scepticism of ESG products has grown in the past few months and it seems inevitable that demand will grow for similar consumer-centric regulation will be rolled out elsewhere. The FCA’s new measures are therefore likely to be a case of beating a path for others to follow rather than setting off in the wrong direction.