The UK’s financial regulator has moved to clamp down on “greenwashing” with proposed restrictions on investment managers using terms such as “green” and “ESG” in fund marketing and a new set of consumer-friendly labels for sustainable investments.
Rules set out by the Financial Conduct Authority on Tuesday include using a set of three fund labels to distinguish types of “green” investing and imposing a higher burden on firms to back up marketing with evidence.
The FCA joins other financial regulators round the world in cracking down on greenwashing, whereby investment managers make unjustified environmental claims for their products. Complaints are rising that unsuitable fossil fuel investments are widely included in funds that are branded as sustainable and regulators want to ensure that individual investors know what they are buying.
“Greenwashing misleads consumers and erodes trust in all ESG [environment, social and governance] 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,” said Sacha Sadan, the FCA’s director of environment, social and governance.
ESG strategies have proved immensely popular with private investors. More than a third of net inflows into UK retail funds in 2021 went into “responsible investment” products, according to the Investment Association. Responsible fund sales have also held up better than other sectors during the market downturn this year.
However, the FCA has warned of the risk of “exaggerated, misleading or unsubstantiated claims” luring investors into products whose green marketing is not backed up by genuine sustainability credentials.
In a letter to fund managers last year, the regulator said it was seeing too many “poor quality” applications for launching ESG-style funds. “One example was a sustainable investment fund containing two ‘high-carbon emissions’ energy companies in its top-10 holdings, without providing obvious context or rationale behind it,” the letter said.
Last week, the UK advertising watchdog, the Advertising Standards Authority, rebuked HSBC for adverts that it judged to be misleading about the bank’s green credentials because they did not mention HSBC’s financing of fossil fuel projects and links to deforestation.
In the US, the Securities and Exchange Commission is working on a rule that will require funds with names using words such as “green” or “sustainable” to disclose how their investments satisfy those descriptions.
“It’s easy to tell if milk is fat-free; it might be time to make it easier to tell whether a fund is really what they say they are,” SEC chair Gary Gensler recently said.
European regulators have also identified greenwashing as one of their priorities. The head of the German asset manager DWS resigned this year after a police raid on the company’s offices in Frankfurt following complaints from a whistleblower over greenwashing.
The FCA has proposed helping investors navigate the world of green investing with the use of three fund labels. These would distinguish funds that: currently hold exclusively sustainable assets; those that encourage their holdings to become more sustainable over time; and those that are focused on having a positive, real-world impact.
Funds that do not fit the criteria for those labels will face limits on using green terminology such as net zero in their names or marketing materials.
Strategies that simply consider ESG as part of their investment approach, so-called ESG integration, do not meet the new standards of what can be considered sustainable.
Fossil fuels including coal, oil and natural gas, as well as nuclear power, will not be excluded under the FCA’s proposed rules but the regulator says managers will have to provide clear explanations of how these assets are suitable investments for sustainable funds.
The FCA is aiming to bring the rules into force in the middle of next year. The regulator will then give existing funds a year to comply, while new funds will have to meet the updated standards to be approved.
