The city regulator has proposed new rules aimed at cracking down on “greenwashing” of investment products.
The growth of “exaggerated, misleading or unsubstantiated” claims about the environmental, social and governance (ESG) credentials of products is damaging consumer confidence and could hamper the transition to a net-zero economy, the Financial Conduct Authority said. (FCA).
The package of new measures includes a requirement for “investment sustainability labels” on products and restrictions on how terms such as “ESG”, “green” and “sustainability” can be applied.
The FCA’s ESG director Sacha Sadan said the rules would “raise the bar” by setting strong regulatory standards that put the UK “at the forefront of sustainable investing internationally”.
He added: “Greenwashing misleads consumers and erodes trust in all ESG products.
“Consumers need to be sure that products claiming to be sustainable really are.
“Our proposed rules will help consumers and businesses build confidence in this sector.
“This supports investment in solutions to some of the world’s biggest ESG challenges.”
The proposals would introduce three categories of sustainable investment product labels, including one backed by “objective criteria” on the sustainability of products over time.
Restrictions on sustainability-related terms would apply to the names and marketing of products that do not qualify for these labels.
The FCA is also proposing a general “anti-greenwashing rule” for all regulated companies to remove misleading claims.
Other measures would require advance disclosure of sustainability features of investment products to retail and institutional investors, including items that consumers may not expect to be part of a product.
The FCA said such details can often be “buried” in documents, with “excessive” costs associated with finding and understanding relevant information.
Stricter demands would also be placed on investment platforms to make sustainability information more accessible.
The FCA added that it is now stepping up its “supervisory commitment” to sustainable finance and improving its compliance strategy.
This includes checking on how companies have responded to a letter sent to fund managers in July 2021, which sets out “guiding principles for the design, delivery and disclosure of sustainable investment products”.
Consultation on the proposals runs until January, with new rules expected to be tabled before June 2023.
The initial focus is on UK-based funds and portfolio management, but the FCA said it intends to consult on expanding the scope to overseas products at a later date.
The proposals support meeting the Government’s ambition set out in the roadmap for sustainable investment published in October 2021, the FCA added.