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October 31, 2022

Industry leaders and standard setters react to FCA’s proposed rules on ‘greenwashing’

By Santiago Bedoya-Pardo

The UK’s Financial Conduct Authority (FCA) has proposed a set of rules and measures aimed at curtailing greenwashing in an effort to both protect consumers and improve their trust in sustainable investment products. This move comes as part of a trust and integrity building plan set out by the regulator.

These proposals will further seek to introduce “Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ can be used in product names and marketing for products which don’t qualify for the sustainable investment labels”. With such measures, the regulator seeks to further protect consumers from misleading marketing ploys.

These proposed rules seek to empower and protect consumers in their decision-making process, as made evident when taking into account the proposal to introduce sustainable investment product labels. These labels will rest on a total of three categories, which will include a specific category for products seeing to improve their sustainability over time, one for products already aligned with the FCA’s sustainability criteria, and a final category for products delivering a positive environmental or social impact.

As stated in the consultation paper issued by the FCA, these measures act as a response to the rapid growth seen in the market for sustainable investment products, both in the United Kingdom and worldwide, with 81% of adults signalling that they “would like the way their money is invested to do some good as well as provide financial return”. Broadridge Financial Solutions has “predicted that the global market for sustainable investment products will reach $30 trillion by 2030”.

Wealth managers, such as Hargreaves Lansdown, have had positive reactions to these proposed restrictions, highlighting how “greater clarity and terminology homogeny within the sector, alongside a crackdown on greenwashing, will help drive better outcomes for investors as well as the planet and society”. Industry leaders like Deloitte have offered similar comments to these proposed changes, with Stephen Farrell, UK partner in audit and assurance, saying that: “Transparency of underlying labelling criteria, and clarity on the basis upon which this information is reported to customers will be important in further enhancing confidence in sustainability and ESG data.” While both Hargreaves Lansdown and Deloitte have adopted supportive attitudes to these proposals, KPMG UK wealth and asset management risk and regulation lead Daniel Barry said: “Wealth, fund and asset managers and their retail products will be most impacted by the proposed requirements. These firms will have to undertake a significant product classification exercise to determine which of their products are eligible for the FCA’s proposed labels and consider whether they meet the FCA’s ‘qualifying criteria’.”

These restrictions will not be the first attempts at diminishing the use of greenwashing in the industry, with prior attempts including the negative screening, whereupon products have excluded certain investments given their failure to meet sustainability criteria set by the manager’s values.

Given the role played by misleading marketing on the FCA’s proposal, the Advertising Standards Authority (ASA) was reached out for comment. In a statement, the ASA said that they “have been proactively monitoring ad claims across different sectors and we respond to concerns from members of the public or business about green claims they think are misleading or irresponsible.” In addition to this, the standard setter has set its sight on “carbon neutral” and “net zero” ad claims, coinciding with the concerns voiced by the FCA.

The FCA’s decision to introduce these proposals comes at a time in which sustainability is becoming increasingly attractive to consumers worldwide, making of these restrictions a necessity for the long-term quality and integrity of sustainable investment products.

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