The UK’s Financial Conduct Authority (FCA) has finalised a package of new rules to prevent greenwashing in asset management.
The Sustainability Disclosure Requirements (SDRs) include an “anti-greenwashing rule” to ensure sustainability claims are “fair, clear and not misleading”, which will apply to all firms authorised by the FCA from May 31st, 2024.
The FCA has prepared guidance to help companies comply with this rule, and is accepting comments on its wording until January 26. The supporting document states that sustainability claims should be correct and capable of being substantiated, presented in a way that can be understood, complete (taking into account a product’s entire life cycle), and fair in their comparison to other products.
Additionally, new investment labels, disclosure, and naming and marketing rules will be implemented between July and December 2024, applying specifically to UK asset managers.
The rules do not apply to pension funds or portfolio management products and services yet, though the FCA is set to open a consultation around their wider application soon.
With the new package, the regulator hopes to “demonstrate that it is possible to introduce rules that protect consumers but also help the market to grow,” says its Director of Environmental, Social and Governance Sacha Sadan.
Improving transparency in sustainable finance
Sustainable finance experienced record growth until 2021, but investor concerns over the sector’s lack of standardisation, as well as the veracity of ESG funds’ claims, has led to several consecutive months of outflows.
A 2022 survey of almost 1,500 investors showed that 70% of them believe investments that claim to be sustainable actually aren’t (which may also have to do with the fact that almost all investment funds think corporate sustainability reports contain greenwashing).
“It's a very important area, but with such a minefield of variety in it, that negotiation and understanding needs to be very carefully collaborated and joined together,” George Roffey, the Chief Sustainability Officer of UK-based financial advisory firm Centrus, told CSO Futures earlier this month.
The new FCA rules – along with a “regulation tsunami” that includes the EU Taxonomy and Sustainable Finance Disclosure Regulation, as well as the Securities and Exchange Commission’s proposed amendment to its name rule – aim to increase transparency in this growing sector.
“We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity. By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment,” added Sadan.