The UK’s financial watchdog has released several measures aimed at improving the transparency of green investment products, including an “anti-greenwashing” rule, as transparency around green finance becomes a major concern among regulators.
The Financial Conduct Authority’s (FCA) measures include product labels to help investors understand assets better, clearer marketing and naming requirements, and an anti-greenwashing rule to ensure sustainability claims by investment firms are not misleading.
The rules will help the UK maintain its place as a leader in sustainable finance as well as help investors “judge whether funds meet their investment needs,” said Sacha Sadan, director of the FCA’s environmental, social and governance unit.
The anti-greenwashing rule will apply to all FCA-authorised firms and require any claims about sustainability to be clear, correct and complete.
The FCA’s measures include four labels that funds can be labelled as if they meet certain criteria:
- sustainable focus is for funds that invest in assets with a high standard of sustainability;
- sustainable improvers for assets that have the potential to improve;
- sustainable impact for funds that can prove their assets are targeting social and environmental solutions;
- sustainability mixed goals, for fund managers that blend different strategies.
The fourth label was added after feedback from stakeholders in its initial consultation on ESG labeling.
Funds can use the labels if at least 70% of the gross value of the product’s assets are in line with its sustainability objective. They must also include specific indicators to measure progress against sustainability objectives. Meanwhile the new naming and marketing rules mean that asset managers cannot use the words “sustainable” or “impact” if they are not using the product labels.
Around 630 UK-based funds will be affected by the labelling, naming and marketing rules, the FCA said.
The UK watchdog’s labelling rules are in contrast to the EU, which has focused on disclosures rather than a labelling system. The EU is unlikely to take up labelling anytime soon, although it may consider it in due course, Derville Rowland, deputy governor of the Central Bank of Ireland, said during a speech in late November.
The bloc’s sustainable finance disclosure regulation (SFDR) has come under scrutiny for having too many loopholes, leading the EU to consult on limited changes to the rules.
Still, the FCA’s rules might not be enough to protect consumers, as they don’t require a third-party assessment of if the standards have been met and are instead allowed to self-regulate, said Lydia Prieg, head of economics at the New Economics Foundation.
She also criticised that 70% of funds have to be sustainable, despite a higher bar of 80% being suggested in the US and EU. She was also skeptical that the ratings criteria would be “robust and measurable” as pension products were exempt and ESG rating agencies are not regulated. As ESG has become more popular, advocates have argued that the agencies making these ratings need to be under more scrutiny to prevent greenwashing and conflict of interest.
If the FCA really wants to increase investment, it will need to tighten its proposals, Prieg said. Meanwhile, the Bank of England should follow other central banks in setting up a green lending programme with lower interest rates for green investments, she said.
“This would reduce financing costs for green projects, while allowing, if required, higher interest rates elsewhere in the economy to combat inflation,” she said.
The anti-greenwashing rules will come into force at the end of May 2024, while firms can begin to use labels at the end of July 2024. Naming and marketing rules will take effect from 2 December 2024. The FCA has also warned banks against greenwashing when making sustainable-linked loans.
This page was last updated December 13, 2023
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