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October 26, 2022

‘Challenging but robust’: reactions to UK FCA’s anti-greenwashing rules

The UK regulator proposes a consumer-focused labelling regime alongside sustainability disclosure requirements, differentiating itself from existing EU regulation.

The Financial Conduct Authority has published proposals on how it will regulate UK sustainability investment products. Originally scheduled for the second quarter of this year, they cover: sustainable investment labels and their qualifying criteria; product- and entity-level disclosures; and naming and marketing rules.

In its consultation paper, the FCA suggests three investment product labels: sustainable focus, sustainable improvers and sustainable impact. It will also require firms to disclose specific information to consumers, including on investments that a consumer may not typically associate with sustainability objectives, which would need to be clearly signposted as “unexpected investments” and accompanied by an explanation on why a certain sector, for example, is held in the product. 

The investment community had been waiting for an update since May when – under then prime minister Boris Johnson – ministers withdrew the UK’s Sustainability Disclosure Requirements from the Financial Services and Markets Bill. So far, the proposals appear to have been well received.

Abrdn head of multi-asset sustainability Craig Mackenzie said forcing sustainable funds to demonstrate they ‘walk the talk’ with relevant empirical data was the key innovation in this approach. Firms’ responsibility over data and methodologies used to justify their sustainability label is referenced throughout the consultation paper. “It’s going to be challenging, but it’s a robust foundation for ESG regulation,” he added.

At the UK Sustainable Investment and Finance Association, CEO James Alexander also welcomed the announcement, saying it would boost investor confidence, while the proposed sustainability labels recognised “savers’ diverse preferences for addressing real-world sustainability challenges”.

But Robin Penfold, partner at UK law firm TLT, said the complexity of the task and meeting the stated objectives of the proposals should not be underestimated, “especially given how heavily the FCA’s behavioural research suggests consumers will rely on information about the key sustainability-related features of a product when the rules are eventually put in place”.

Alignment with other regimes?

The FCA said while it has sought to achieve international coherence with other regimes – such as the EU Sustainable Finance Disclosure Regulation and proposals by the US Securities and Exchange Commission – the “starting point for our proposals is, however, different” because of the focus on consumers. The UK’s category criteria also appear stricter.

SFDR, which has been in place since March 2021, imposes mandatory sustainability disclosures across the EU under which asset managers must adopt one of three product categorisations, Articles 6, 8 or 9. 

Sacha Sadan, director of ESG at the FCA, said that some Article 8 funds, which according to EU regulation must promote environmental and social factors and are in a stricter category than those suitable for the Article 6 definition, would not necessarily be able to meet the SDR requirements for sustainability, according to Ingnites Europe. Article 9 funds have sustainability as their core objective.

Others in the industry anticipate the same challenge. “I like the [FCA’s] three label categories, they are sensible and reasonably easy to distinguish. Though they are demanding. This is more Article 9 than Article 8,” said an asset manager asking not to be named. He added: “Most ESG funds in the UK market make use of [investment] exclusions and ESG scores to define their ESG status. These two approaches don’t look as if they will be sufficient to get the labels.”

The FCA also plans to impose more detailed disclosures for institutional investors, as well as restrictions on the use of terms such as ‘ESG’, ‘green’ or ‘sustainable’ in names and marketing of products that don’t qualify for the sustainable investment labels. It also proposed a more general anti-greenwashing rule to reiterate the requirement that “sustainability-claims must be clear, fair and not misleading”.

The FCA regime will initially focus on UK-based managers but intends to expand its scope to overseas products. The consultation is open until January 25 2023, with the requirements coming into effect on June 30 2024 at the earliest.

Photo credit: FCA

A service from the Financial Times