City watchdog to crack down on fund greenwashing with new rules
25th October 2022 10:56
by Kyle Caldwell from interactive investor
The proposals restrict how sustainability-related terms can be used in fund names and the marketing of funds.
The Financial Conduct Authority (FCA) is proposing new rules for fund firms in a bid to clamp down on greenwashing.
‘Greenwashing’ is a term for when asset managers push themselves or their funds as ‘green’ through marketing, rather than fully integrating ESG (environmental, social and governance) and sustainability into their investment processes. This has been on the FCA’s radar for some time. The City watchdog has previously warned that applications for new sustainable fund launches often “fall below expectation” and “contain claims that do not bear scrutiny”.
The new rules proposed by the FCA include sustainability labels for funds, and restrictions on how terms such as ‘ESG’, ‘green’ or ‘sustainable’ can be used.
The FCA says that sustainable investment product labels will give consumers the confidence to choose the right products for them. There will be three categories: sustainable focus, sustainable improvers, and sustainable impact.
Funds that do not meet any of the categories will be restricted on how sustainability-related terms can be used in fund names and the marketing of funds.
The watchdog is also proposing a more general anti-greenwashing rule covering all regulated firms, which it says “will help avoid misleading marketing of products”.
The regulator is also considering consumer-facing disclosures to help people understand the key sustainability-related features of an investment product. This includes disclosing investments that a consumer may not expect to be in the product.
It also wants fund firms to provide more detailed disclosures that are suitable for both institutional investors and retail investors who want to know more.
The FCA says that there’s been growth in the number of funds marketed as ‘green’ or making wider sustainability claims. It adds that exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products.
The regulator says that it wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.
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Sacha Sadan, the FCA’s director of environment social and governance, said: “Greenwashing misleads consumers and erodes trust in all ESG products. 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.”
Due to potential greenwashing investors have become more sceptical of the sustainable or ESG investment claims made by fund management firms, according to research by the Association of Investment Companies (AIC) and Research in Finance.
A study of 402 investors found that 58% of respondents are not convinced by the sustainable claims from funds, up 48% from last year. Of those who do not consider investing sustainability, 55% said they were not convinced, up from 27% in 2021.
Becky O’Connor, head of pensions and savings at interactive investor, says the FCA’s proposals are a “necessary and positive intervention in the market for green and sustainable financial products.”
O’Connor adds: “Investors who want to make their money make a difference need to be able to trust that the investment they are buying actually does what it says on the tin.
“With so many different, and often conflicting, rating systems and definitions currently floating around, it can be hard to know what investments are truly helping the planet and easy to lose faith in the whole idea of sustainable investment.
“The FCA’s measures should go a long way to restoring faith and eliminating exaggerated and downright misleading marketing of financial products. Moves towards official definitions and labels are a welcome development.”
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