The Financial Conduct Authority (FCA) has launched a consultation on proposed measures to clamp down on “greenwashing” of investment funds and products. The regulator is proposing a better-defined labelling and disclosure framework so that investors’ trust is not eroded by exaggerated, misleading or unsubstantiated claims of sustainability.
Distinct labelling, qualifying criteria that firms must meet to use a label, product- and entity-level disclosures and marketing rules for UK funds are at the heart of the FCA’s consultation “Sustainability Disclosure Requirements (SDR) and investment labels”. The regulator proposes three categories for funds – those that exclusively hold sustainable assets; those which encourage their investee entities to change and/or improve their sustainability credentials over time; those providing solutions for positive real-world outcomes.
The criteria for this category include at least 70% of the product’s assets meeting a ‘credible standard’* of environmental and/or social sustainability or aligning with a specified environmental and/or social sustainability theme. *The FCA describes such a standard as being robust, independently assessed, evidence‑based and transparent.
The FCA is keen that the proposed regime accommodates assets in transition to becoming sustainable. As stewardship activities will be integral to this category, requirements include clear and measurable targets for improvement in the sustainability profile of the invested assets, timescales and escalation triggers.
Here the impact objective is pre-defined. Funds would be expected to have a stated theory of change and to pursue highly selective asset selection aligned with it.
Funds and products without a sustainability objective but which may use ‘ESG integration’ would not qualify for a sustainable investment label. Nor would employing exclusions or negative screening or ESG ‘tilts’ alone, unless combined with one of the criteria of the three proposed categories.
The FCA is also proposing to prohibit funds that do not qualify for the three categories above from using alternate terms such as ‘ESG’, ‘green’, ‘climate’, ‘responsible’, ‘impact’, ‘Paris-aligned’ and ‘net zero’ in their name or marketing.
A two-tiered approach is being proposed for disclosures:
The proposed rules are expected to come into force mid 2023. Existing funds will have a year to comply with the new standards, new funds will obviously have to comply straightaway if they are to gain regulatory approval. General anti-greenwashing rules for all regulated firms, irrespective of whether they have sustainable products or not, will also apply straightaway. A separate consultation is to follow on how the proposals may be applied in respect of non-UK funds.
With the growth in investment funds and products claiming ‘sustainability’ and a multitude of terms being employed to attract investors, the FCA’s proposals may seem stringent but are a step in the right direction towards an industry standard on criteria, clear labelling and disclosure requirements which should help safeguard against greenwashing and engender trust in sustainable investment products’ objectives and expected outcomes.