UK’s Financial Conduct Authority launches consultation on new rules to prevent “exaggerated, misleading or unsubstantiated” claims regarding ESG products which can damage consumer confidence
The UK’s Financial Conduct Authority (FCA) has launched a consultation on proposed new rules intended to provide the public with more accurate and reliable information on the fast-growing number of investment products offered by UK-based funds and portfolio managers that carry ESG-friendly tags such as ‘sustainable’ or ‘green’.
The financial watchdog said exaggerated, misleading or unsubstantiated claims about ESG credentials risked damaging confidence in these products. It said it wanted to ensure that consumers and firms could trust that products have the sustainability characteristics claimed.
“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,” Sacha Sadan, the FCA’s ESG director.
Sadan claimed the proposed rules would make the UK a leader in 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 are part of the FCA’s ESG Strategy and Business Plan, which aims to build trust in ESG-labelled instruments, products and the supporting ecosystem, as the sector expands rapidly. The UK market for UK domiciled responsible investment funds grew 64% in 2021 to reach £79 billion, compared to 11% growth in UK-domiciled funds overall, according to UK trade body the Investment Association.
Proposals outlined in the consultation paper include the introduction of sustainable investment product labels intended to improve consumer confidence over investment decisions. One will be for products that improving their sustainability over time.
The FCA also wants to restrict how some 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. A proposal for a general anti-greenwashing rule covering all regulated firms is also part of the consultation.
Another proposal is for disclosures to help consumers understand the key sustainability-related features of an investment product, including disclosing investments that a consumer may not expect to be held in the product.
Other include more detailed disclosures suitable for institutional investors or retail investors, and requirements for product distributors, such as investment platforms, to make labels and disclosures clear and easily accessible to consumers. The FCA said it would also increase its supervisory engagement on sustainable finance and enhancing its enforcement strategy.
The consultation is open until 25 January 2023, with final rules expected to be published before the end of the first half 2023 and prospective introduction date for labelling of mid-2024. Consumer research which the FCA says supports its proposals has also been published.
While the current proposals are focused on UK-based funds and portfolio management, the FCA said it planned to expand the scope of its consultation later to overseas products.