Ahead of the anti-greenwashing rule coming into force on 31 May, the Financial Conduct Authority (FCA) is supporting industry with guidance to help firms and teams to meet the standard. The new rule is designed to protect consumers by ensuring sustainable products and services they are sold are accurately described.
Results from the FCA’s latest Financial Lives survey shows significant consumer interest in sustainable finance as 81% of adults surveyed would like their investments to do some good as well as provide a financial return. This work supports the long-term growth and competitiveness of the sector by helping businesses meet this demand and ensuring consumers who invest in sustainability-related financial products can make informed decisions.
The FCA is also consulting on extending to portfolio managers the requirements on how sustainable investments are labelled and explained, making consumer choice easier. These are firms that manage a group of investments for consumers, which can either be offered as standardised products or tailored services.
The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023. They include:
- product labels to help consumers understand what their money is being used for.
- naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.
Sacha Sadan, Director of Environmental, Social and Governance, FCA, said:
“Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment. Our good and poor practice anti-greenwashing examples will help firms market their products in the right way. We continue to work closely with the ASA and CMA to address greenwashing.
“Consumers care about investing in products that have a positive impact on the planet and people. That’s why we want to boost the integrity of the market and ensure people can make informed decisions about how to invest their money.”
Commenting on the FCA’s update, Gemma Woodward, head of responsible investment at Quilter Cheviot, said:
“The FCA extending its Sustainability Disclosure Requirements to portfolio management is the logical next step in the process. Having consistency across the investment landscape is going to be critical if the SDR labels are to be a success and that customers are not misled on the sustainable credentials of their portfolios. Portfolio management services, be that model portfolios or bespoke offerings, have become increasingly popular in the last decade. While the burden will now increase on those providers, it is important consumers and advisers can accurately compare services and that there is a level playing field for sustainable offerings – this will be particularly interesting for bespoke offerings which should reflect the customer’s requirements.
“This is a far-reaching piece of regulation from the FCA and as such it requires careful navigation. As the industry evolves, additional clarification on what can and cannot be said, particularly around the naming and marketing of funds and portfolios, will be crucial. This works both ways in that we want to avoid ‘green hushing’ as much as preventing greenwashing. This is where an investment underplays its sustainable credentials so as not to inadvertently overstep the mark. It is a phenomenon already seen in the US and it is vital that we do not see if creep into the UK.
“For advisers, this also underscores the importance to be up to speed and trained in this area of investments. Clients will increasingly be asking about or for sustainable related investments, and as such the advice industry needs to have the confidence and skills to have those conversations. The FCA is working with advisers to help open these communication channels, but more needs to be done by everyone given the rules will come into force imminently. Given the rise in the use of model portfolios, this gives advisers another good opportunity to review their practices around sustainable investment.
“The FCA has also finalised its anti-greenwashing rule today, putting in place clear guidelines for how asset and wealth managers should communicate the environmental, social and governance credentials of their portfolios. This is a clear extension of the things like the Consumer Duty, where the FCA is putting a high bar on customer understanding. It is likely the FCA will police this effectively in the early days to ensure compliance is high and as such providers will need to review and update their marketing if they have not already done so.”
According to Mikkel Bates, Regulatory Manager at FE fundinfo, “The FCA’s latest consultation paper (CP) indicates a significant shift towards inclusivity by extending the same sustainability disclosure requirements to discretionary portfolios as are currently applied to funds. This alignment ensures that at least 70% of the assets in portfolios are invested in line with the declared sustainability objectives, which offers a level of transparency previously reserved for funds. Notably, portfolio managers with retail clients are now under the same obligations for ‘naming and marketing’ as well as for disclosures, fostering a uniform standard across the investment landscape.
“In terms of the final guidance, it remains closely aligned with the previous draft, GC23/3, affirming the FCA’s commitment to the four underlying principles (claims should be correct and capable of being substantiated; they should be clear and understandable; they should be complete; and they should be fair and meaningful). What’s commendable is the inclusion of clear examples of ‘good practice’ in the final guidance, embodying the FCA’s principle-based approach. While not exhaustive for every scenario, these examples provide a concrete foundation for compliance, ensuring clarity in the market’s direction. It’s a balanced framework that gives enough room for interpretation yet offers ample guidance to prevent any ambiguity for firms, thus supporting informed decision-making for investors.”
George Latham, Managing Partner of WHEB Asset Management, says: “Given the importance of model portfolio services (MPS), it is critical that the FCA extend the Sustainability Disclosure Requirements (SDR) to this part of the market. We are pleased to see the consultation paper and the strong degree of alignment with the Policy Statement PS23/16 including on thresholds, consumer disclosures and timelines. We understand the pragmatic approach of treating each underlying fund as an asset, but the 70% threshold that applies to underlying funds should be seen as a floor and not a ceiling in our view.
“Noting the FCA’s comment that a label on its own is not an absolute measure of sustainability, WHEB will continue to provide all the underlying data on our investments that will be needed by MPS providers to underpin their use of the sustainability labels.”
Also commenting on the launch of the FCA’s final guidance to support its rule to prevent greenwashing by financial institutions, Richard Weighell, Financial Services Advisory Partner at accounting and business advisory firm BDO LLP said: “We welcome publication of the FCA’s final guidance on the anti-greenwashing rule, introduced by the Sustainability Disclosure Requirements, which will provide welcome additional guidance to the industry.
“The final guidance and accompanying press release by the FCA confirms the 31 May 2024 as the date of entry into force for the rule. Now authorised financial institutions have clarity on the implementation date, there is now a short window to prepare.
“The FCA’s objective of introducing the anti-greenwashing rule is to protect retail and institutional customers from greenwashing while also creating a level playing field for firms offering products and services with genuine sustainable characteristics.
“As one of the 69 respondents to the three questions to FCA consulted on, we welcome the updates to the initial guidance. The key updates are: clarification of the scope of the anti-greenwashing rule; the provision of further examples by the FCA, including good practice examples; and clarification of the interrelation between the anti-greenwashing rule and the SDR’s naming and marketing rules.”
Lucy Blake, Partner and greenwashing legal expert at Jenner & Block’s London office, said companies are damned if they do, damned if they don’t as she comments: “The FCA’s action is part of a wider trend of UK authorities taking action against greenwashing and the message to financial institutions (and other companies) is clear – the temperature is rising and green statements need to be meticulously substantiated.
“Companies face increasing pressure from investors, shareholders, consumers and regulators to operate ethically and sustainably, while remaining profitable.
“However, the more companies say, the greater the risk of saying the wrong thing. Businesses that exaggerate their green credentials, even unintentionally, can face the wrath of regulators, who are armed with hefty fines. Firms can also suffer extensive reputational damage.
“It may be tempting for companies to batten down the hatches and say nothing at all to avoid scrutiny. But this is no easy way out. If companies remain tight-lipped about how they are mitigating environmental problems, they risk accusations of misleading investors and the market by obscuring the risks.
“Many companies find themselves walking a tightrope between greenwashing and greenhushing — damned for saying the wrong thing or damned for saying too little. The solution for companies caught in these crosshairs is honesty, transparency and a demonstrable commitment to positive change.”
