The United Kingdom’s Financial Conduct Authority is rolling out a series of regulations intended to crack down on inaccurate environmental, social, and governance (ESG) related claims, known as greenwashing, by providers of investment products to retail investors.
The FCA’s measures include putting in place new sustainability disclosure requirements and an investment labels system, as well as an “anti-greenwashing” rule. The regulator says it conducted “detailed engagement with a range of stakeholders, including industry, other regulators, and consumer groups.” The move follows similar ESG regulations adopted by the EU in recent years.
The sustainability disclosure requirements are designed to provide clarity and standardization in how sustainability is measured and reported. Investment firms will be required to produce consumer-facing disclosures summarizing the product’s key sustainability characteristics. The FCA says this would “help consumers to understand those characteristics and compare similar products.” The consumer-facing disclosure will be required by firms for all products, including those which were not engaged in sustainability-related strategies.
A second measure will regulate labels ESG investment products use that will assist investors in understanding how their investments align with specific sustainability goals. There will also be an anti-greenwashing rule, which mandates that all authorized firms ensure their sustainability-related claims are fair, clear, and not misleading.
“Research has shown that investors weren’t confident that sustainability-related claims made about investments were genuine,” the FCA said in a statement. “This isn’t helped by a lack of consistency when firms use terms such as ‘green’, ‘ESG’ or ‘sustainable.'”
To tackle this issue, the FCA will introduce:
- An anti-greenwashing rule for all authorized firms to make sure sustainability-related claims are fair, clear and not misleading
- Product labels to help investors understand what their money is being used for, based on clear sustainability goals and criteria
- Naming and marketing requirements so products cannot be described as having a positive impact on sustainability when they don’t
“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,” said Sacha Sadan, director of environmental, social, and governance at the FCA. “By improving trust in the sustainable investment market, the U.K will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international center of investment.”
Sustainability Labeling System
Investment firms will need to satisfy a set of requirements in order to use specific investment labels to help consumers navigate the investment product claims and differentiate between various sustainability objectives. The new system offers four different labels with specific requirements:
- Sustainability Focus: applicable to products investing mainly in assets that are sustainable for people and the planet. Firms will be tasked to set their own “robust, evidence-based” standards to ensure they align with the product’s sustainability objectives.
- Sustainability Improvers: applicable to funds investing in assets that may not be sustainable now, but aim to improve their sustainability for people and the planet over time, including in response to the firm’s stewardship influence. This category focuses on the assets’ potential to meet the standards over time, placing an even higher emphasis on firms’ asset selection processes.
- Sustainability Impact: applicable to funds investing in solutions to problems impacting people or the planet to achieve “real-world impact.” These products will need to have an explicit objective to achieve a positive and measurable contribution to sustainability outcomes.
- Sustainability Mixed Goals: applicable to funds investing across different sustainability objectives and strategies aligned with the other three categories. This means firms will also need to disclose details of the proportion of assets invested “in accordance with each relevant label.”
The anti-greenwashing rules will be the first to take effect starting in May of 2024, followed by the labelling system at the end of July 2024 and the naming and marketing rules, which will apply starting in December 2024. 
Joseph McCafferty is editor & publisher of Compliance Chief 360°.