The 'green premium': How the FCA is responding to greenwashing claims

The FCA reported in November 2023 that over 80% of retail investors are looking for fund investment which provides environmental and social benefit, not merely profitable return. The demands of investors seeking to ensure investments are sustainable is resulting in a so-called 'green premium' where investment is attracted to those businesses sporting environmental credentials and fund value is increased by demand. 

Into this space however has come allegations of inauthentic claims and business activities that contradict those claims. In addition, there is a fog of confusion as to recognisable targets and what would be the measure of success. Ultimately this has led to scepticism regarding the promotion of responsible and green investment opportunities. 

Use of misleading terms

The FCA has stated that over 70% of retail investors share a concern that claims made are inauthentic and/or amount to 'greenwashing', a term descriptive of the preponderance of a company to use environmental credentials as way of defecting attention away from a poor record in other regards.

To ensure market credibility and promote the UK as a competitive centre for asset management and sustainable, the FCA (and indeed other regulators) response is to provide robust control over use of terms which may be misleading, coupled with disclosure and reporting obligations to ensure that claims are met.

As set out in the preface to the FCA's Practice Statement [PS13/16] Sustainability Disclosure Requirements (the "SDR"), consumers find it difficult to identify products that meet their sustainability preferences. This is not helped by a lack of standardised, accessible information and the use of unclear or confusing terms. For example, terms such as ‘ESG (Environmental, Social and Governance)’, ‘responsible’, ‘green’ or ‘sustainable’ are open to interpretation and are often used loosely and interchangeably."

Sustainability Disclosure Requirements 

The SDR applies to all FCA regulated firms, including most types of asset managers and distributors and investment products of UK domiciled funds that are offered. A consultation is on-going as to treatment of overseas funds. 

The SDR focuses on 5 areas:

1. Anti-greenwashing rules: From 31 May 2024, anti-greenwashing rules will apply to all FCA authorised firms making sustainability related claims, requiring claims to be clear, fair and not misleading. Any promotion must follow the so-called 5C's; namely claims must be correct and capable of being substantiated, clear and straightforward to understand, complete and not seeking to hide or be only partially accurate and must be fair and meaningful in relations to comparisons. The Rules apply to all financial promotions, websites, newsletters, communication and social media including imagery not just text. 
2. Investment labels: From 31 July 2024, an investment firm may apply one of 4 FCA labels to any product, but must notify the FCA if it does so, and must follow regulatory requirements. The labels that may be applied are 'Sustainability FOCUS' (investments that are meeting objectives), 'Sustainability IMPROVERS' (investments that have potential to reach objectives), 'Sustainability IMPACT' (investments designed to meet pre-defined goals), or 'Sustainability MIXED GOALS' (investments that are a combination of each). To apply these labels the fund must have the labels objective as determinative of investment decision making and 70% of the fund must be dedicated to that objective, meeting KPI's and having disclosure and reporting obligations.
3. Naming and marketing requirements: From 2 December 2024 the use of a number of 'sustainability terms' attaching to products must be accurate and subject to applicable disclosure. These terms include 'sustainable', 'responsible', 'net zero', 'green', 'climate' and 'impact'. If a product does not have sustainability label (as set out above) but uses a sustainability term in its promotion, there must be an accompanying statement explaining why there is a divergence.
4. Disclosure: If using a FCA label or sustainability term the investment firm must produce consumer facing disclosure which is clear, concise, reviewed and revised. Detailed product disclosure must also be made available to those requiring more information pre-contractual, at on-going product level and at entity level.
5. Distributors: The SDR in addition requires distributors (namely a firm which offers, recommends or sells investments or provides investment services to clients) to similarly ensure that produce level information (including labels) is made available to consumers.

Comment

The FCA is just one of many Regulators who are looking to provide a framework in which companies can promote green credentials that are authentic and independently scrutinised. These measures are in part a way to protect the move to a greener economy from attacks that businesses are just virtual signalling and ultimately that their actions are ineffective. However, regulation also needs to be coupled with a move to internationally recognised benchmarking and/or non-financial audit reform. This requires international political consensus which in 2024 (the year of elections) looks unlikely.