ESG has become the City’s favourite acronym over the past three years and almost every boss and investment manager has scrambled to plant their flag on the standards as closely as they possibly can.
But those claims and labels don’t always stand up to scrutiny. Greenwashing is running rampant. Clean and green claims are being abused, and a regulatory reckoning now looms.
Sacha Sadan, director of ESG at the Financial Conduct Authority (FCA), has been tasked with leading the clampdown on greenwashing in the UK since 2021. And he tells City A.M. in an interview that he has not been afraid to ruffle a few feathers in the process.
“I came into this role knowing that I wouldn’t be loved. It’s okay,” Sadan says.
“I’m old enough and I’ve supported a crappy football team for long enough not to worry about being a glory hunter.”
And ruffle feathers Sadan certainly has. In its most significant greenwashing push yet, the FCA is setting out rigorous sustainability disclosure requirements and drawing up standards around investment labels to try and restore consumers’ trust in “sustainable investment products”.
He argues the move will ramp up protection for consumers and is already winning the admiration of regulators globally. But he has also warned that if applied to the market in its current state, it would flush out some two thirds of the products currently labelled as ESG friendly in the industry.
That prediction has triggered backlash from certain political and industry figures. The chair of the influential Treasury Select Committee Harriet Baldwin accused the FCA of using “suspiciously round numbers” to justify its claims, while industry body the Investment Association (IA) warned it risked sparking a major market “dislocation”.
Sadan, however, says the FCA is simply guiding firms along a path most of them are already taking, and not every firm can just claim to be green without repercussions.
“I’m not here to tell people to do ESG – they’re already doing it. They’re already making commitments. They’re already selling lots of products, and people are buying them,” he says. “I’m just trying to put standards in place and trying to do it internationally.”
But, he adds, we do “need to raise the bar” and “not every fund [can] get in”.
The FCA is set to lay out its policy statement on labelling in the third quarter of this year after receiving some 240 responses to its consultation. Despite the punchy rhetoric from the IA and certain members of the Treasury Select Committee, he says the move has been broadly welcomed.
Sadan and his team are now on an industry-wide engagement push to roll the ground ahead of future rules
and help the industry understand their impact.
Fossil fuels and war
The acronym is still misinterpreted by many as a synonym for climate-friendly and green, but, in reality, it is more complicated than that, Sadan explains.
Sadan, who was plucked from his former role at Legal & General Investment Management by FCA chief Nikhil Rathi, says he went out of his way to stress that point to staff at the regulator.
He raised eyebrows internally by calling in the chairman of weapons and defence firm BAE Systems, Sir Roger Carr, to be his first webinar guest at the FCA.
“This was way before the Russia-Ukraine crisis. I got him in and of course, there were people saying ‘you’re the ESG guy – why don’t you get a wind turbine farm?’
“Roger is chairman of just about one of the biggest employers in the UK. Brilliant apprenticeships, engineering degrees, world-leading stuff going on,” Sadan said.
The crux of the issue lies not in the fact that it’s a defence company, but “what kind of defence company it is,” Sadan says. And the same standard extends into the legacy oil and gas giants.
“It’s okay to own an oil and gas company in a climate change fund if you are trying to do something with it. [Tackling] climate change is more than just owning solar panel farms,” he says.
“I do like solar panels farms. I think they’re really important. But we have to make sure we reduce emissions in the industries that are [already] there.”
Black and white issue?
That pragmatic approach to ESG rules has thrust the FCA towards the front of the pack in regulatory standards internationally.
Outside of the EU, the City’s watchdog has been among the fastest movers and is now at the heart of bringing rules together in a more consistent international framework. Sadan heads up an International Sustainability Taskforce for the international body IOSCO and says UK regulation is now playing an integral role in shaping what global rules could look like.
“We are working with everyone from the SEC, Hong Kong… Japan is doing something very similar on ESG ratings,” he says. “Things are moving, but are they moving fast enough for everyone? Of course not, it takes time.”
The fragmentation of rules remains one of the fundamental issues facing the sector. The US is moving at a more sluggish pace than the UK and Europe, triggering some fears that business may gravitate towards the slacker regulatory framework.
But Sadan says the FCA has no plans of slowing down. Demand among retail investors is shifting further towards sustainability and he argues his duty is to “look after UK consumers”.
“We have a commitment from the government and therefore we should try to do this. Others will follow – we can’t just be followers,” he says.