Savers are being cheated by investment companies selling green schemes to consumers, the city watchdog has warned, as it announces a crackdown on so-called “greenwashing” by financial firms.
The Financial Conduct Authority has accused managers of selling funds to environmentally conscious clients, but instead investing their cash in fossil fuels and other harmful businesses.
The watchdog has proposed a series of measures against greenwashing, including restrictions on the use of “sustainable” labels, as well as asking managers to back up their green claims with more evidence.
In recent years, do-it-yourself investors have flocked to investment funds that prioritize environmental, social, and governance factors, dubbed “ESG” funds. In 2021, green funds accounted for nearly two-thirds of total fund inflows, according to analyst Calastone.
However, the FCA previously warned fund managers that it was concerned about the number of “poor quality” fund applications it had seen. In one case, the FCA said a sustainable investment fund contained “two ‘high carbon’ energy companies in its top 10 holdings, without providing obvious context or rationale,” such as how the company planned to the transition to net zero.
FCA’s Sacha Sadan said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers need to be sure that products claiming to be sustainable really are.”
The watchdog said its proposals would help build confidence in the green investment sector. Ms Sadan said: “We are raising the bar by setting strong regulatory standards to protect consumers in line with our broader FCA strategy.”
Rob Morgan of wealth manager Charles Stanley welcomed the proposals. “The problem is that we’ve had an alphabet soup of different terminology in sustainable investing,” he said. “The new rules would set the parameters and standardize the language so investors know what to expect.”
Morgan said sustainable funds typically charge higher fees and should be required to show why they were worth the extra cost.
He said: “In the debate between passive and active investing, ESG managers have a good argument. They can justify higher fees because their proprietary research can give them an advantage in identifying companies to invest in.”
However, the absence of centralized standards for ESG investing has allowed some fund managers to use sustainable terminology in their advertising without committing to a green investment strategy.
Other regulators have clamped down on ESG as greenwashing claims increase. Last week, HSBC was accused of misleading consumers and greenwashing its reputation in a ruling by the advertising watchdog. The Advertising Standards Authority found that the bank had made unqualified claims and omitted material information about its environmental credentials in two commercials that appeared in October last year.
The FCA will publish its final rules on greenwashing at the end of June 2023.