City watchdog launches sustainable investment measures to tackle greenwashing

The Financial Conduct Authority (FCA) will put in place its Sustainability Disclosure Requirements and an investment label regime for retail investors in 2024.

The move comes following months of consultation, research and engagement with a range of stakeholders, including industry, other regulators and consumer groups.

It also comes as the sustainable investment market continues to grow with an estimated £14.5 trillion of ESG-orientated assets now being managed globally.

The FCA said the new measures will protect consumers by helping them to make more informed decisions when investing and enhance the credibility of the market.

An anti-greenwashing rule for all firms will come into effect from May 31 next year, aiming to ensure sustainability claims are fair, clear and not misleading.

The watchdog is also introducing investment product labels from July 31 next year to help investors understand what their money is being used for.

The four labels – “sustainable focus”, “sustainable improvers”, “sustainable impact” and “sustainability mixed goals” – will be based on a product’s sustainable goals and criteria.

Each label will require at least 70% of the gross value of the product’s assets to be invested in line with their sustainability objective, while the remaining 30% must do no harm or be in conflict with the overall objective.

Of 630 funds marketed as sustainable in some way, the FCA estimates that 45% could have a label.

The remaining 55% of these funds that do not have a label will still need to disclose further information to investors to show exactly what they are trying to do in terms of sustainability.

Finally, the FCA will introduce a naming and marketing requirement for asset managers from December 2, 2024, which aims to ensure products cannot be described as having a positive impact on sustainability if they do not.

Sacha Sadan, director of environmental, social and governance at the FCA, said: “We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity.

“By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment.”

The FCA’s recent Financial Lives survey found that 81% of adults would like the way their money is invested to do some good as well as provide a financial return while 76% would like to invest in a way that protects the environment and 74% would like to invest in a way that has a positive social impact.

But the research also found that investors are not confident that sustainability-related claims made about investments are genuine, which has not been helped by a lack of consistency when firms use terms that can be open to interpretation, such as “green”, “ESG” or “sustainable”.

Sheldon Mills, executive director of consumer and competition, at the FCA said: “The context of this is for the UK to maintain is position as a global investment hub.

“We need to keep with the pace of change and offer products that consumers want and understand.

“We know from our research that there’s a high demand for sustainable products from consumers both here in the UK and globally.

“At the same time, we know the market is growing. We have built this regime with those consumers in mind and the rules were put in place to maintain trust in the market and support its long-term growth.”

Galina Dimitrova, director of investment and capital markets at the Investment Association, said: “Today’s publication of the new Sustainability Disclosure Requirements (SDR) and investment labels regime brings welcome clarity to investment managers on the regulator’s expectations for this important area of the fund market, and we fully support the aim to bring greater transparency and comparability to sustainable investment which will help investors make informed investment decisions.

“We are pleased to see that the regulator has listened and taken a broader approach on several key issues, such as the accommodation of mixed-asset funds within the labels and greater flexibility over marketing rules.

“We also welcome the commitment to work with other regulators around the world to encourage compatibility of sustainable finance standards.

“This more inclusive and pragmatic approach should ensure that standards in the sustainable investment market are raised and investors are better equipped to make informed choices across the full range of funds.

Sam Richardson, deputy editor of Which? Money, said: “It’s encouraging to see the regulator introducing new labels which should make it easier for people to find and compare investments that align with their values.

“We have previously warned about the gap between sustainability claims and reality when it comes to current and savings accounts providers, so the introduction of an ‘anti-greenwashing rule’ for other financial products, such as savings accounts and mortgages, is another positive step.

“Consumers need to be confident that the financial products they’re buying really do what they say on the tin, so it’s vital that the Financial Conduct Authority’s labels, controls on the use of terms like ESG and general ‘anti-greenwashing’ rules are properly enforced.”

However, Iona Silverman, partner and leading “greenwashing” lawyer at law firm Freeths: “The FCA’s proposals are overdue and scant on detail.

“Both financial advisers and consumers alike need transparency to enable informed decision making when investing.

“The FCA needs to up its game and do much more to reassure investors that they are making the right choices.”