FCA wants to tackle greenwashing with new proposals to protect ESG-labelled instruments

The Financial Conduct Authority (FCA) has proposed an anti-greenwashing package intended to protect consumers and improve trust in sustainable investment products.

New measures include investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used.

The proposal is part of the FCA’s efforts to build trust and integrity in ESG-labelled instruments, products and the supporting ecosystem.

FCA wants to tackle exaggerated, misleading or unsubstantiated claims about ESG credentials

The FCA’s initiative follows recent growth in the number of investment products marketed as ‘green’ or making wider sustainability claims, many of which are found to be exaggerated, misleading or unsubstantiated claims about ESG credentials.

Such practice damages confidence in these products and the FCA is attempting to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.

Sacha Sadan, the FCA’s Director of Environment Social and Governance, said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”

The proposals put forth by the FCA include the following:

  • Sustainable investment product labels that will give consumers the confidence to choose the right products for them. There will be three categories – including one for products improving their sustainability over time – underpinned by objective criteria.
  • 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. It is also proposing a more general anti-greenwashing rule covering all regulated firms. This will help avoid misleading marketing of products.
  • Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product – this includes disclosing investments that a consumer may not expect to be held in the product.
  • More detailed disclosures, suitable for institutional investors or retail investors that want to know more.
  • Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.

The UK’s financial watchdog is also doubling down on its supervisory engagement on sustainable finance as well as enhancing its enforcement strategy.