Industry experts are reacting as the UK Financial Conduct Authority’s anti-greenwashing rule came into effect today (31 May).
Michaela Walker, Partner at Eversheds Sutherland, said: “Some firms have had major programmes reviewing all their publicly available information and amending it. Others have been more relaxed.
“The FCA has made it clear that this is a regulatory priority for it so we can expect it to review information firms are putting out on ESG and to take action where firms get this wrong.
“Firms need to be sure that the statements they are putting out are correct, complete and clear and they can stand behind the statements. It is also not just the words being used but the impression that clients may get from colours used and pictures which may form an impression in an investor’s mind which is not justified from and ESG/sustainability perspective. Also different people mean different things in sustainability so it’s important that firms are clear with their definitions.
“The repercussions are that the FCA will carry out thematic or specific reviews and require remediation or put firms into enforcement which may lead to fines and of course, reputational issues.”
Angela Hultberg, global sustainability director, Kearney, said: “As consumers become more environmentally conscious, there is a growing temptation for companies to make misleading claims about their ESG credentials and engage in rhetoric that exaggerates their actual impact. Meanwhile, other companies are guilty of launching sustainability projects or product lines in an effort to distract from the less environmentally aspects of their work. Today’s long-awaited regulation should help curb these widespread issues.
“While the general public is already getting better at identifying misleading claims, as reflected by the rising number of civil society actions on this issue, today’s legislation should mean that in the future, they won’t have to. When combined with the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, the regulation coming into force today will be a big step towards full transparency on sustainability practices.
“It’s high time firms move beyond merely making their products and services sound environmentally friendly to genuinely creating sustainable solutions. Climate change is a critical issue that requires action now, and as consumers become even more environmentally conscious, transparency will be essential.
“Under the new guidance, companies will have to make evidence-based product labels that clearly explain to consumers what their money is being used for. This will build further trust with consumers, allowing them to make more informed choices, and to have a genuinely positive impact on our planet”
While Carla Nunes, managing director in the Office of Professional Practice, Kroll, said: “This FCA rule is a great step towards the protection of investors, and in particular retail investors who may not have the necessary knowledge to ascertain whether certain claims by investor managers are being misleading.
“Under general FCA rules, regulated asset managers and fund advisors already have the duty to communicate with customers in a fair, clear and non-misleading way. However, in recent years, as investor appetite grew for ESG and sustainability related investment products, the risk of greenwashing also increased. This can be a serious issue for investors, as they may be investing in products that aren’t meeting their desired objectives.
She continued: “The FCA anti-greenwashing rule is trying to protect consumers of ESG financial products (i.e., investors) by requiring (with some exceptions) that an investment product carrying the label of “sustainability” has at least 70% of the gross value of the product’s assets to be invested in accordance with its stated sustainability objective. Similar rules recently finalized by ESMA in the EU and the SEC in the United States actually have a higher threshold of 80%. But the objective is similar – to protect investors from misleading “sustainability” or ESG claims.
“The FCA also added examples to help guide regulated entities to disclose and communicate with clients in a clear and not misleading manner regarding sustainability. The transition of the global economy into a more sustainable world will require massive investments towards the green energy transition. If investor confidence in products designed to finance such a transition is shaken or put into question, capital allocation into those products will suffer. That, in turn, may have negative consequences for the planet overall and its people so this ruling is a great step in the right direction.”
Chris Fidler, head of global industry standards, at CFA Institute said: “SDR lays the groundwork for more accurate, transparent disclosures and labels. These requirements will provide retail investors with a clearer picture of how ESG factors are incorporated into the investment process.
“But SDR is not a silver bullet, indeed no regulation is ever going to offer a perfect solution. Retail investors can’t simply close their eyes, look at a fund’s name or label, and trust it will be in line with their values and financial goals. They still need to investigate and monitor their investments to make sure they understand where their money is going.”
“These issues are complex and we shouldn’t let perfect be the enemy of good; we will need to continue to examine how SDR works in practice to assess its effectiveness.”
