The U.K.’s Financial Conduct Authority (FCA) has released a package of measures aimed at curbing greenwashing, the practice of companies using exaggerated, misleading, or unsubstantiated sustainability-related claims about their products. Among other things, the FCA proposes to require investment product sustainability labels and restrictions on how terms like “ESG,”, “green,” or “sustainable” are used.
The FCA said that the proposals are consistent with its overall ESG strategy, and are designed to ensure that investors can trust that products have the sustainability characteristics they claim to have. The FCA hopes to finalize the rules and to have some of the basic anti-greenwashing requirements go into effect by July 1, 2023. However, the labeling, naming and marketing, and initial disclosure requirements would not go into effect until at least June 30, 2024.
Focus of proposals. The proposals cover the following main areas:
- Sustainable investment labels to help consumers navigate the investment product landscape and enhance consumer trust.
- Consumer-facing disclosures to help consumers understand the key sustainability-related features of a product.
- Detailed disclosures on pre-contractual disclosures covering the sustainability-related features of investment products.
- A new sustainability product report that discloses ongoing sustainability-related performance information including key sustainability-related performance indicators and metrics, and a sustainability entity report that covers how firms are managing sustainability-related risks and opportunities.
- Naming and marketing rules that will restrict the use of certain sustainability-related terms in product names and marketing materials unless the product uses a sustainable investment label.
- Requirements for distributors to ensure that product-level information, including the labels, is made available to consumers.
- A general anti-greenwashing rule that applies to all regulated firms which reiterates existing rules to clarify that sustainability-related claims must be clear, fair, and not misleading.
Labels. The proposals include the following three broad sustainable investment labels: sustainable focus; sustainable improvers; and sustainable impact. This is how the FCA defines each label:
- Sustainable Focus: Products with an objective to maintain a high standard of sustainability in the profile of assets by investing to 1) meet a credible standard of environmental and/or social sustainability, or 2) align with a specified environmental and/ or social sustainability theme.
- Sustainable Improvers: Products with an objective to deliver measurable improvements in the sustainability profile of assets over time. These products are invested in assets that, while not currently environmentally or socially sustainable, are selected for their potential to become more environmentally and/or socially sustainable over time, including in response to the stewardship influence of the firm.
- Sustainable Impact: Products with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes. These are invested in assets that provide solutions to environmental or social problems, often in underserved markets or to address observed market failures.