Efforts aimed at curbing the practice of greenwashing are in the headlines once again. In late October, the U.K.’s Financial Conduct Authority (FCA) proposed new measures that intend to protect consumers and build greater trust in investment products that are labeled as sustainable. By promoting greater integrity in ESG-labeled investment instruments and products and in the general investing ecosystem, the proposed measures build on the commitment published in the U.K.’s ESG Strategy and Business Plan.
Sacha Sadan, the FCA’s director of environment social and governance, provided the reasoning on which the measures are based, stating: “Consumers must be confident when products claim to be sustainable that they actually are.”
The measures are laid out in detail in the FCA’s consultation paper on Sustainability Disclosure Requirements (SDR) and investment labels. With the publication of the paper, the FCA opened the public comment period for the proposal; the comment period closes on January 25, 2023. Individuals and groups who want to comment may use the CP22/20 response form.
Trust Is Essential for the Flow of Capital
In its introduction to the proposed measures, the FCA notes that tackling greenwashing is a core regulatory priority. “Already today, greenwashing may be eroding trust in the market for sustainable investment products… So, we need to build guardrails against this to protect consumers from potential harms. If consumers can’t trust the claims firms make about their products, they will shy away from this market, slowing the flow of much-needed capital to investments that can genuinely drive positive change.”
The FCA’s package includes sustainable investment labels and extensive disclosure requirements, as well as naming and marketing rules and requirements for distributors. The rules will determine how sustainable investment product labels can be used and provide the disclosure obligations that will be associated with these labels. While the labels are not required, those who do not use them will be subject to naming and marketing restrictions that limit how they can describe their products with respect to sustainability factors.
Some Specifics from the FCA Consultation Paper
The measures have several components, including:
- Sustainable investment product labels that help consumers select the investment products that are right for them. Three types of labels are proposed:
- Sustainable Focus – products labeled as “sustainable” invest predominantly in assets that can be deemed to be sustainable
- Sustainable Improvers – products that intend to improve the sustainability of their portfolio over time
- Sustainable Impact – products that aim to achieve impact through the provision of finance, primarily to underserved markets
- Restrictions on how certain sustainability-related terms may be used in product names and in marketing for products that don’t qualify for a sustainable investment label.
- Consumer-facing disclosures that aim to help consumers understand the key sustainability-related features of a product.
- More detailed disclosures that are useful for institutional investors or retail investors who want to know more about a product.
- Requirements for distributors of products to ensure that labels and consumer-facing disclosures are accessible and clear for consumers.
More to Come
The FCA intends to publish the final rules by the end of the first half of 2023. And while the FCA’s proposed measures apply to U.K.-based funds and portfolio managers, the FCA plans to follow with a consultation on expanding their scope to overseas products.
Stay tuned, as there’s more in store from the U.K.’s anti-greenwashing effort.