FCA takes key step toward Sustainability Disclosure Requirements with anti-greenwashing consultation.
The Financial Conduct Authority (FCA) has published its much-anticipated consultation outlining measures to tackle greenwashing, including the introduction of three categories for sustainable investments. The framework will form part of the UK’s Sustainability Disclosure Requirements (SDRs), which is the UK’s answer to the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The three new labels are ‘sustainable focus’ (funds investing in sustainable assets), ‘sustainable improver’ (funds investing in assets that are transitioning to be more sustainable over time), and ‘sustainable impact’ (funds targeting sustainable solutions).
To qualify for these labels, funds must demonstrate alignment with the FCA’s expectations for sustainability objectives, KPIs, investment policy and strategy, investor stewardship, and resources and governance.
“Greenwashing misleads consumers and erodes trust in all ESG products,” said Sacha Sadan, FCA’s Director of ESG.
“Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”
No hiding behind labels
The FCA will be introducing restrictions on how certain terms – including ‘ESG’, ‘green’ and ‘sustainable’ – can be used in product names and marketing, giving regulated firms until 30 June 2023 to update their product material accordingly.
Asset managers and other financial services providers will also be expected to publicly disclose the key sustainability-related features of their investment products to customers. Disclosures made to professional investors must include additional detail, the FCA said, including pre-contractual disclosures, ongoing sustainability-related performance information, and sustainability-focused KPIs and metrics. Firms will further need to cover how they are managing sustainability-related risks and opportunities.
The FCA noted that it sought, as far as possible, to achieve “international coherence” with other regimes, such as the EU’s SFDR and the recent proposals published by the US Securities and Exchange Commission (SEC).
The SDRs were first outlined in the UK’s sustainable investing roadmap, which also introduced the UK’s green taxonomy and Transition Plan Taskforce.
Although the new labels for funds are a “good step towards reducing the risk of greenwashing”, Ottilia Csoti, Associate at law firm Fladgate, said that the proposals allow for the inclusion of coal, oil and gas investments “under certain conditions”.
“Given the relatively long lead time for these measures and the scale of the climate crisis, [this] likely means these measures will be of limited effect in urgently directing capital flows away from investments that further the consumption of fossil fuels,” Csoti said.
The consultation is open until 25 January, 2023, with the FCA aiming to finalise its proposals by mid-2023. Rules relating to labelling and disclosure will come into effect from June 2024.
The UK financial markets watchdog also plans to regulate providers of ESG data and scores.
“Greenwashing has been consistently cited as a major challenge to the integrity, trust and growth of sustainable investment in the UK,” said James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF).
“Across the sustainable label categories, we are pleased that the approach recognises savers’ diverse preferences for addressing the real-world sustainability challenges we face. Setting out clear criteria for funds that aim to invest in solutions, achieve positive impact and help to make improvements to the companies that are still on a sustainability journey. The new government must now quickly outline its approach to real economy disclosures and the delivery of the remaining components of the Green Finance Roadmap published for COP26.”
The new greenwashing rules follow a period of climate policy uncertainty. An independent review of the UK government’s net zero approach was almost derailed by its handling of a parliamentary vote on fracking and it is still not clear when the government will release its updated Green Finance Strategy.
The government is also due to launch its consultation on its proposals for a green taxonomy, following the release of advice by the Green Taxonomy Advisory Group earlier this month. The Transition Plan Taskforce is also due to report.