The Financial Conduct Authority (FCA) is set to launch a package of measures aimed at tackling greenwashing with proposed restrictions on how investment managers use terms such as ESG (environmental, social and governance) or green.
Despite volatile market conditions, demand continues for ESG and sustainable funds. By the end of August, responsible funds collectively held £90.3bn, according to research from the Investment Association, up 11% from a year ago and accounting for 6.4% of the £1.4tn UK industry total.
Currently, there is not that much regulation governing how such ESG products can be marketed, beyond broader rules not to mislead consumers.
The FCA said, “Exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products. We want to ensure consumers and firms can trust that products have the sustainability characteristics they claim to have.”
The FCA’s rules will still allow “sustainable” funds to invest in any kind of asset or company, including big fossil-fuel producers.
However, investment managers will have to publish clear justifications showing how such investments met the criteria for one of three new categories.
“There are growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products; claims that don’t stand up to closer scrutiny or so-called ‘greenwashing’,” the FCA said.
There will be three categories. The “austainable focus” products will have to invest primarily in assets that are already deemed to be sustainable, such as renewable energy assets.
“Sustainable improvers” products must be focused mainly on investing in assets to improve their sustainability over time, such as funding polluting companies that have set clear goals to transition to greener energy.
The third category, “sustainable impact”, is for products that help to address environmental and social issues and can show a clear impact, such as investing in developing new green energy assets rather than simply acquiring existing ones.
The authority will restrict the use of terms such as ESG or green or sustainable for products that cannot show they qualify in one of these three categories.
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 that when products claim to be sustainable, they actually are.”
The regulator said it would consult on the proposed new rules until January and would publish finalised rules by June.
“Central to pursuing ESG investing strategies is being able to rely on clear and transparent ESG ratings,” said Gayatri Raman, president Europe and Asia, Clearwater Analytics.
She added, “In this way, it all comes back to the information that underpins these ratings. The FCA rightfully stresses the need for more detailed disclosures for institutional and retail investors alike – key to this is having a robust data infrastructure supported by first in class reporting capabilities.”
Volker Lainer, vice president, product management and regulatory affairs at GoldenSource noted that the difficulty of getting consistent, standardised ESG data, will take time to be remedied by regulators and industry groups.
“In the meantime, ESG data providers and ratings agencies will have to revise products while considering how to align their proprietary methods with new frameworks and taxonomies,” he said.
He added, “This predictable evolution of ESG data sources and requirements will mean financial firms will face ongoing change in ESG data management and related business processes over the coming years.
As it stands, investors and funds must do their own fact-finding to ensure there’s no greenwashing going on within their ESG investments. And with all these issues in play, the financial services industry has a lot of work to do in the next few years to get a handle on ESG data challenges.”