The Financial Conduct Authority is looking to introduce a package of measures aimed at clamping down on greenwashing, while looking to expand the regime for pension products in the future.
In a consultation paper, published on October 25, the regulator is proposing to introduce new rules around sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.
“There are growing concerns that firms may be making exaggerated, misleading or unsubstantiated, sustainability-related claims about their products — claims that don’t stand up to closer scrutiny (so-called ‘greenwashing’),” the FCA said.
“Already today, greenwashing may be eroding trust in the market for sustainable investment products. Trust and integrity in these products are important to the transition to a more sustainable future.”
Consumers must be confident when products claim to be sustainable that they actually are
Sacha Sadan, Financial Conduct Authority
The new rules include restrictions on how investment managers use terms such as “green”, “ESG” or “sustainable” for products.
The FCA said the measures are among several potential new rules that will protect consumers and improve trust in sustainable investment products.
It is proposing to introduce a number of new regulations, including using a set of three fund labels to distinguish types of sustainable investment products.
There will be three categories: sustainable focus, for products investing in assets that are environmentally or socially sustainability; sustainable improvers, for products investing in assets to improve the environmental or social sustainability over time; and sustainable impact, for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact.
FCA director of environmental, social and governance Sacha Sadan said: “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.”
The consultation is open until January 25 and the regulator said it intends to publish final rules by the end of the first half of 2023.
FCA looks to expand rules to pension products
In the consultation, the watchdog recognised “potential for similar consumer harm” in other areas such as pensions and will look to expand the regime to the sector in due course, while working with other government departments to “ensure a consistent and coherent approach”.
The FCA’s view is that it “would be most decision-useful” to apply a sustainable investment label to pension products at the level at which the consumer invests, rather than at a scheme level.
“So, in respect of these rules, the label and accompanying product-level disclosures would apply at the level of the constituent funds,” it said.
This means a provider’s default fund would be able to use a sustainable investment label if 90 per cent of the total value of the constituent funds qualified for the same label.
However, the FCA noted that such a rule might not be appropriate for pension products, giving the example of default arrangements that change over time to reflect the change in consumers’ retirement journey and risk appetite.
The watchdog is therefore seeking views from the industry on what would be a feasible approach for these products.
The FCA will also consider the interaction between labels and disclosures by companies in scope of its rules, and disclosures by firms in scope of requirements from the Department for Work and Pensions, it added.
FCA’s proposed rules
Restrictions on how certain sustainability-related terms — such as “ESG”, “green” or “sustainable” — can be used in product names and marketing for products that do not qualify for the sustainable investment labels. It is also proposing a more general anti-greenwashing rule covering all regulated companies.
Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product.
More detailed disclosures, suitable for institutional investors or retail investors that want to know more.
Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
Implementation deadline
The City watchdog said this consultation paper will be of interest to all FCA-regulated companies, as it is proposing to introduce general “anti-greenwashing” rules that will apply to all firms.
“The core elements of the regime — labelling and classification, disclosure, and naming and marketing rules — will apply to asset managers initially,” it said.
The FCA said the anti-greenwashing rule will require companies to implement it immediately on publication of the policy statement, which has a provisional date of June 30 2023.
Companies that are distributors of in-scope products to retail investors, including platforms and advisers, will have 12 months after the policy statement.
For the naming and marketing rules, there will be two deadlines: 12 months after the date of the policy statement (provisionally June 30 2024), and 18 months after publication (December 30 2024).
Companies that are providing portfolio management arrangements will be exempt from the naming and marketing rules when 90 per cent or more of the value of constituent products qualify for any label.
This article first appeared on FTAdviser.com
