The Financial Conduct Authority (FCA) has proposed a new set of rules on how investment products can use terms around environmental, social and governance (ESG) matters.
With the move, which is part of the FCA’s ESG strategy first published in November 2021 and the subsequent 2022/23 business plan, the regulator aims at “protecting consumers and improving trust in sustainable investment instruments, products and the supporting ecosystem”.
The plans suggest three categories of labels – including one for products improving their sustainability over time – that are underpinned by objective criteria to allow investors to choose the right products for them
Restrictions have also been proposed for how labels such as ‘sustainable’, ‘green’ or ‘ESG’, which have been inconsistent, confusing to the consumer and a potential opportunity for greenwashing, are used in names and marketing for products that do not qualify for the sustainable investment labels.
Consumer-facing disclosures on sustainability-related features that are “accessible and clear to consumers”, including on investments that a consumer may not expect to be held in the product, are also to be expected.
Sacha Sadan, the FCA’s director of environment social and governance, said these proposed rules will help consumers and firms build trust in the growing ESG space.
“Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are.”
By also stepping its supervisory engagement on sustainable finance and enhancing its enforcement strategy, the FCA pledged to bring 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,” Sadan concluded.
Becky O'Connor, head of pensions and savings at interactive investor, described the proposals as “a necessary and positive intervention” in the green and sustainable financial products market.
"With so many different and often conflicting rating systems and definitions currently floating around, it can be hard to know what investments are truly helping the planet and easy to lose faith in the whole idea of sustainable investment,” she said.
"The FCA's measures should go a long way to restoring faith and eliminating exaggerated and downright misleading marketing of financial products. Moves towards official definitions and labels are a welcome development."