‘A great step in the right direction’: FCA’s anti-greenwash rules enter into force

Nearly 60 banks collectively provided $705.8bn to firms involved in in the fossil fuel sector last year.

Late last year, the FCA confirmed plans to introduce new measures to prevent asset managers from misleading investors about the environmental and social impacts of their funds.

Today (31 May), these anti-greenwashing rules have come into force.

Asset managers will now be required to adhere to the new Sustainability Disclosure Requirements (SDR) rules. These rules prohibit vague references to ‘sustainability’, ‘ESG’, or related terms in fund marketing. Instead, asset managers will be required to provide “clear, complete” information and select one of four specific fund labels.

The labels are ‘Sustainability Focus’, ‘Sustainability Improvers’, ‘Sustainability Impact’ and ‘Sustainability Mixed Goals’.

Asset managers will need to demonstrate that at least 70% of the fund’s assets support the chosen label.

Moreover, firms will be required to provide consumer-facing disclosures about a fund’s sustainability activities; offer detailed pre-contractual and ongoing disclosures at both entity and product levels for labelled or sustainability-referenced products; adhere to naming and marketing rules that restrict the use of certain sustainability terms to ensure accurate claims;and comply with additional rules for UK distributors, including the provision of product-level information.

Looking forward, the FCA is also consulting on extending SDR to portfolio managers. The proposed labelling and SDR for portfolio managers includes ensuring that product labels are accurate to help consumers understand what their money is being used for, and introducing marketing requirements to ensure that environmental claims are backed up.

Implementation guidance

The FCA issued new guidance last month to help the industry meet these new standards. Guidance includes good and poor practice examples of greenwashing to help firms implement the rule.

Furthermore, the UK Sustainable Investment and Finance Association (UKSIF) and PwC have released an implementation roadmap to help financial firms navigate the challenges of complying with the new SDR guidelines. The ten recommendations include:

• Carefully choose product labels under the SDR, balancing commercial benefits and stakeholder expectations.
• Ensure compliance with the 70% sustainability threshold for labelled funds.
• Create a firm-wide product classification framework for SDR and international regulatory coherence.
• Engage early with distributors to align on product sustainability features and labels.
• Conduct a comprehensive greenwashing review firm-wide.
• Develop an internal taxonomy to identify and prevent greenwashing.
• Focus sustainability reporting on what is most relevant to the business and clients.
• Streamline data collection and integrate existing reporting processes.
• Align reporting cycles with TCFD reporting when possible.
• Adopt a strategic, long-term approach to reporting for organisational value.

UKSIF’s chief executive James Alexander said: “This regulation can empower our members to better demonstrate and evidence their sustainable investment approaches and strategies in an environment where consumers are increasingly looking to put their money into funds that more closely align with their values.

“We are committed to supporting our members to take full advantage of the opportunities of the FCA’s SDR and help guide them through this first crucial year of implementation.”

The investor community has welcomed the FCA’s new SDR guidelines, with some calling it “a great step in the right direction.”

Industry reaction

Carla Nunes, managing director, Kroll:

“This FCA rule is a great step towards the protection of investors, and in particular retail investors who may not have the necessary knowledge to ascertain whether certain claims by investor managers are being misleading.

“The transition of the global economy into a more sustainable world will require massive investments towards the green energy transition.

“If investor confidence in products designed to finance such a transition is shaken or put into question, capital allocation into those products will suffer. That, in turn, may have negative consequences for the planet overall and its people so this ruling is a great step in the right direction.”

Angela Hultberg, global sustainability director, Kearney:

“As consumers become more environmentally conscious, there is a growing temptation for companies to make misleading claims about their ESG credentials and engage in rhetoric that exaggerates their actual impact.

“It’s high time firms moved beyond merely making their products and services sound environmentally friendly to genuinely creating sustainable solutions.

“Under the new guidance, companies will have to make evidence-based product labels that clearly explain to consumers what their money is being used for. This will build further trust with consumers, allowing them to make more informed choices, and to have a genuinely positive impact on our planet.”

Richard Weighell, financial services advisory partner, BDO LLP:

“While the final guidance was only published last month, firms have had a significant amount of time to prepare for the introduction of the FCA’s anti-greenwashing rule.

“By now, they should have substantially completed their programmes of work to ensure sustainability-related claims in their communications are clear, fair and not misleading.

“Given the long lead time ahead of the introduction of the rules, we expect the FCA to immediately be monitoring firms.”

Paul Hamalainen, global sustainable finance and UK prudential policies director, Mazars:

“As the anti-greenwashing rule comes into force [today] it is good that the FCA has supplemented the rule with guidance on regulatory expectations and examples of good and bad practices.

“Now it is down to companies to undertake a drains-up assessment of their sustainability practices and promises to ensure they are operating in accordance with the guidelines and the requirements for public disclosure. Firms shouldn’t underestimate how long this could take.”

Ruth Knox, global co-chair of the ESG & sustainable finance practice, Paul Hastings:

“Today the FCA’s anti-greenwashing rule comes into effect, with the purpose of ensuring sustainability claims are fair, clear and not-misleading.

“While there has historically been some confusion on whether anti-greenwashing guidance emanating from the FCA extends beyond retail, new guidance is very clear, and clearly addresses market feedback on the difficulty of labelling products – as a result, we can expect the FCA to be steadfast in upholding the rule moving forward.”