Amanda Khatri
Editorial Manager
UK regulators have warned they will come down hard on financial services firms that make false or exaggerated sustainability claims, as new rules enter force in the coming weeks.
Ahead of the anti-greenwashing standard which goes live on May 31, the FCA published guidance to help firms meet the requirements.
The regulator is also considering an extension of the rule, which would apply to a wider scope of advisers and cover portfolio managers alongside asset managers.
“As the SDR and labelling regime has been developed primarily for retail investors... the proposals to extend the regime are primarily aimed at wealth management services for individuals and model portfolios for retail investors,” the FCA said in its consultation document.
Trillions of dollars worldwide have been poured into investment offerings that promote sustainability, however, global regulators have become suspicious of claims that do not match up with reality.
After introducing the initial guidelines, the FCA wants to strengthen the integrity of the UK’s financial markets by broadening the rules to cover firms that manage a group of investments for consumers.
“Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements (SDR) and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment," said Sasha Sadan, the FCA’s ESG director.
The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023.
They include:
· Product labels to help consumers understand what their money is being used for;
· Naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.
“The FCA extending its Sustainability Disclosure Requirements to portfolio management is the logical next step in the process,” said Gemma Woodward, head of responsible investment at wealth manager Quilter Cheviot. “Having consistency across the investment landscape is going to be critical if the SDR labels are to be a success.”
Why are UK regulators concerned about greenwashing?
First floated in November 2023, the UK’s anti-greenwashing rule was drawn up to protect retail investors by ensuring products and services accurately reflect sustainability goals.
It requires all firms to label products and services clearly and not mislead investors about environmental claims that cannot be backed up.
A recent FCA Financial Lives survey showed that 81% of adults would like their investments to do some good and provide financial returns.
The City watchdog’s efforts are to deliver on this demand whilst increasing the competitiveness of the investment management sector.
“Consumers care about investing in products that have a positive impact on the planet and people. That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money,” said Sadan.
The guidance helps to achieve this by ensuring firms are on the right track. It provides good and poor practice anti-greenwashing examples which will provide guidance on how firms can market their products correctly.
What does the greenwashing rule mean for compliance?
The FCA’s guidance asks firms to “regularly review their claims and any evidence that support them” and “ensure that their claims remain compliant with the anti-greenwashing rule on an ongoing basis.”
Before the 31 May deadline for the anti-greenwashing regulation, regulated firms will need to ensure they meet greenwashing regulatory standards.
The ESG landscape is a complex one especially with diverging approaches across the US, UK, and Europe, requiring diligence from compliance teams given how quickly messaging can change.
“This is a far-reaching piece of regulation from the FCA and as such it requires careful navigation,” said Woodward. “As the industry evolves, additional clarification on what can and cannot be said, particularly around the naming and marketing of funds and portfolios, will be crucial.”
It is evident that regulatory change is incoming, so making sense of the requirements early and implementing them to the best standard will take the heat off compliance teams.
This could mean reviewing or adjusting marketing materials and disclosures to ensure they accurately reflect sustainability goals, or by vetting language in materials and making sure any claims are substantiated by evidence, experts said.
CUBE comment
The FCA’s proposed greenwashing rules help promote transparency and fairness in markets and allow investors to make better-informed decisions.
Over the last few years, there has been a real divide between the US, UK, and Europe in their approaches to tackling climate change risks.
The FCA’s guidance will help UK businesses to ensure their practices align properly with the standards set by the regulator.
Those who will prosper will be those that have effectively implemented an AI-powered solution to anticipate, analyse, and implement any changes.
With the ever-shifting tides of climate change and regulation, those that fail to adapt or evolve with technological advancement, are those that will be left behind…