FCA consults on sustainability disclosures and investment labels: seeks to tackle greenwashing and build consumer trust in green products

The publication of the FCA’s long-awaited consultation paper on Sustainability Disclosure Requirements and investment labels (CP22/20) marks a significant milestone in the Government’s roadmap to Greening Finance. The FCA has clearly thought carefully when developing a consumer-focused regulatory framework that seeks to bring some much-needed rigour into the design, distribution and marketing of “sustainable” investment products. A more meticulous system is to be welcomed as the explosive growth in the number of so-called “sustainable” products in recent years has, more often than not, meant that the sustainability credentials of many of these products have been unsubstantiated, unclear, or just plainly exaggerated.

A couple of interesting initial points emerge from this consultation:

First, the consultation highlights the FCA’s concern with the potential for greenwashing to erode trust in the market for sustainable products as a whole, particularly in the consumer/ retail market. Consumer trust is a necessary ingredient for a successful longer term transition to such products, and the FCA is clearly worried about the risk that capital flows to genuinely sustainable investments may be significantly affected if market integrity is compromised, and the development of the market prematurely stymied as a result. This FCA’s objectives of consumer protection (seen as well in its recent rules on the consumer duty) and enhancing market integrity are clearly in play as it seeks to support the government’s stated ambition for the UK to be the leading centre for sustainable investment.       

Second, and related to the above, of particular note is the proposed introduction of a general “anti-greenwashing” rule that will apply to all FCA-regulated firms (including those that approve financial promotions for unauthorised persons), not just to the managers of in-scope investment products. As proposed, this will take the form of a new rule in the ESG sourcebook (ESG 3.3.1R(1)) requiring all firms to ensure that any reference to sustainability characteristics of a product or service is: (i) consistent with the sustainability profile of the product and service; and (ii) clear, fair and not misleading.

As acknowledged by the FCA, existing standards and conduct rules already require that any client communication be “clear, fair and not misleading”. Whether the first limb of this proposed rule is necessary is debatable. The FCA takes consistency in this respect to mean that sustainability claims made should be “proportionate and not exaggerated”. Arguably, references in products or services to sustainability characteristics that is “fair and not misleading” should, by definition, already be “consistent” with the sustainability profile of that product or service. Nonetheless, the FCA is of the view that a direct and explicit link between conduct rules and sustainability claims would make it easier for them to “challenge firms that [they] consider to be potentially greenwashing their products or services, and take enforcement action…as appropriate.” By proposing such a broad rule, the FCA seems to be signalling the seriousness of its intent when it comes to taking action against poor practices in this area.