FCA takes stance on greenwashing

by Matthias Plötz 27 October 2022

The FCA has published a new consultation paper, aimed at protecting consumers and retail investors from greenwashing by increasing transparency and consistency.

Final legislation would apply to all FCA-regulated firms and focus on sustainable investment labels and their qualifying criteria, product and entity-level disclosures, as well as naming and marketing rules.

According to the regulator, final legislation will not be in place before 30 June 2024 at the earliest.

What’s on the table?

Initially, proposed legislation should cover the following:

  • Sustainable investment labels
  • Consumer-facing disclosures
  • Detailed product-level disclosures
  • Pre-contractual disclosures
  • On-going sustainability-related performance indication
  • Sustainability entity reports
  • Naming and marketing rules
  • Requirements for distributors
  • A general 'anti-greenwashing' rule

Sustainable investment labels
The FCA proposes a distinction between three different types of investment, based on intentionality. Whether or not to apply a label will be left up to firms, however retaining a label would require clearly defined objectives and regular reporting.

“Qualifying for the FCA sustainability labels under these proposed rules is a much more complex task than categorising a fund under the EU’s SFDR, which most fund managers will now be familiar with. Many fund managers will have to implement a fresh approach to product classification in light of these proposed rules, and may have to tweak their strategies to satisfy the detailed qualifying criteria for the labels. For strategies that firms want to position as sustainable, and which are subject to both these proposed UK rules and the EU rules, for example that are marketed through both UK and EU funds, there will be a delicate balancing act in trying to comply with both regimes,” commented Benjamin Maconick, managing associate in the financial regulation team at Linklaters.

Entity reports
All in-scope asset managers would be required to report on sustainability as per the proposal.

Larger firms (more than £50bn AuM) would be required to disclose by 30 June 2025 and smaller firms, excluding any less than £5bn AuM, a year later.

The regulator has proposed disclosures on three different levels, namely consumer-facing, on the product-level and pre-contractual disclosures.

“These proposed FCA rules involve a significant step-up in the level of detail required in sustainability-related disclosures, however they remain relatively non-prescriptive, for example around what counts as a sustainability-aligned investment,” Maconick added. “This feeds into a wider issue that is common to sustainability disclosures generally, as even in the EU where the EU’s Green Taxonomy is in effect, it does not seek to define every possible approach to sustainability, and firms complying with regimes such as the EU SFDR still have to come up with their own frameworks, for example to assess social sustainable investments.”

Naming & Marketing
The FCA further proposes sustainability labels and consumer-facing disclosures to be made easily accessible to the public.

General ‘anti-greenwashing’ rule
Finally, the FCA proposed an ‘anti-greenwashing rule’ which would reiterate requirements of clarity, fairness, and non-misleading for sustainability-related claims. This would come into immediate effect on publication of the policy paper.

Next steps
The regulator has asked for comments which need to be made by 25 January 2023.

A final policy statement should arrive by the end of H1 2023.

At this point, the proposed policy will only apply to UK-domiciled funds, with a separate consultation paper regarding overseas funds yet to come.

“You could have funds that are subject to both regimes at the same time, given the EU SFDR applies to non-EU funds marketed in the EU, and some fund managers might have strategies that are packaged in UK and EU products for marketing in the respective jurisdictions where they would need to think carefully about how they navigate the two regimes that would apply to those different vehicles,” said Maconick. “However, given that post-Brexit many retail funds marketed in the UK are established in the EU, in particular Ireland and Luxembourg, it does mean that these initial proposals are going to apply to a more limited number of funds than they might seem.”

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