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Financial and investment businesses that use misleading “green” claims have been put on notice with a proposal by the Financial Conduct Authority (FCA) for a package of new measures including investment product sustainability labels and restrictions on how terms like “ESG”, “green” or “sustainable” can be used.
The measures are among several potential new rules that will protect consumers and improve trust in sustainable investment products. The work forms part of the commitment made in the FCA’s ESG Strategy and Business Plan to build trust and integrity in ESG-labelled instruments, products, and the supporting ecosystem.
There has been growth in the number of investment products marketed as “green” or making wider sustainability claims. Exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products. The FCA wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.
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,” he said.
“This supports investment in solutions to some of the world’s biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”
The FCA is proposing to introduce:
The FCA is also stepping up its supervisory engagement on sustainable finance and enhancing its enforcement strategy. This includes checking how firms have responded to the expectations set out in the Dear Chair letter issued to authorised fund managers in July 2021.
Stuart Crotaz, UK sustainable finance partner at EY, said the package of measures in the FCA’s consultation paper provided much-needed clarity on the regulator’s approach to ESG, including measures to stamp out greenwashing.
“Crucially, the FCA is also proposing targeted rules for the distributors of investment products to UK retail investors,” he said.
“While the regulator has sought to achieve international consistency with other regimes, the proposals do diverge in some crucial aspects, such as sustainable investment labels. This will inevitably throw up challenges for firms trying to flex their business and operating models to handle both EU and UK rules. Whilst the greater clarity provided by the new approach will be welcomed by firms, it will create regulatory complexity when it comes to operating across jurisdictions.
“Although the proposed new regime won’t be live until 2024, together with the FCA’s Policy Statement expected June 2023 on supervisory and enforcement activity, today’s announcement clearly shows that the FCA is seeking a step-change in current practice.”