Asset managers could soon be forced to remove ESG and sustainability branding from their funds if they fail to meet the Financial Conduct Authority’s new green criteria.
As part of rules set to come into effect next year, asset managers will be barred from using terms like “green” to market funds that do not meet the regulator’s standards.
The City watchdog outlined the proposals on 25 October, which include a package of anti-greenwashing measures that could pose significant challenges for some funds cashing in on the ESG frenzy.
There has been explosive growth in the number of funds billed as green or touting sustainability credentials. However, the regulator said “exaggerated, misleading or unsubstantiated claims” about ESG credentials had been damaging consumer confidence.
“Greenwashing misleads consumers and erodes trust in all ESG products,” said Sacha Sadan, the FCA’s ESG director. “Consumers must be confident when products claim to be sustainable that they actually are.”
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Under the new regime, ESG strategies will be categorised as “impact,” “aligned” and “transitioning,” referring to funds that are helping companies decarbonise in line with net-zero targets based on “objective criteria”.
These will be matched to three labels for consumers: Sustainable Focus, Sustainable Improvers and Sustainable Impact.
Products that do not meet the sustainability criteria will not be given a label, and will need to clearly specify they are “not promoted as sustainable”.
Funds may be categorised as “responsible” if they contain some sustainable investments, but will sit outside the FCA’s green categories.
“A labelling system can play a valuable role in providing a useful shorthand to help savers navigate the growing number of sustainable and responsible investment products and to compare the sustainability credentials of their investments,” said Galina Dimitrova, director for investment and capital markets at the The Investment Association, a trade body for the UK asset management industry.
Ottilia Csoti, an associate at law firm Fladgate, said clear categories could reduce the risk of greenwashing.
“However, the proposals allow for the inclusion of coal, gas and oil investments under certain conditions which, given the relatively long lead time for these measures and the scale of the climate crisis, likely means these measures will be of limited effect in urgently directing capital flows away from investments that further the consumption of fossil fuels,” she added.
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The FCA also said it was stepping up its wider ESG scrutiny of firms after setting out its expectations in a Dear Chair letter in July 2021.
Top lawyers have been warning their asset management clients that a regulatory crackdown is “a matter of if, not when”, Financial News previously reported.
Mark Manning, a technical specialist in the FCA’s sustainable finance and stewardship team, said earlier this month that the regulator had launched a multi-firm review of funds marketed with ESG credentials and would not be afraid to fine or ban firms for “egregious bad behaviour”.
Phil Spyropoulos, financial services partner at Eversheds Sutherland, said: “The FCA has continued to push ahead with its own ESG strategy despite considerable political uncertainty. That’s a bet that may well have paid off given that the only published government position was developed under Rishi Sunak’s tenure as chancellor.”
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