Promising to crack down on greenwashing, the UK’s Financial Conduct Authority on Wednesday presented its long-awaited proposal for sustainable investment rules, going a step further than similar rules in the EU and US by suggesting three different sustainability labels for investment funds instead of two.
The FCA, as UK financial supervisor, said it wants to introduce restrictions on the use of sustainability terms such as “ESG”, “green” and “sustainable” on products that don’t qualify. The authority also proposed a general anti-greenwashing rule for all regulated firms to avoid misleading marketing.
Unlike the EU, the FCA now introduced a clear threshold of 90% for sustainable investments in a portfolio that is labelled as such. The equivalent EU rules do not specify such a threshold, which has left the industry in doubt over how to classify sustainable investments. Many EU regulators had been holding back their own threshold guidance, with some saying they were waiting for the FCA. Some, like AFM in the Netherlands, have guided on 100%.
Presenting a consultation paper titled “Sustainability Disclosure Requirements (SDR) and investment labels”, the FCA said its rules aim to protect consumers and improve trust in sustainable investment products. Its proposal sets out clear restrictions on how terms such as ESG, green and sustainable can be used in product names and fund marketing.
“Greenwashing misleads consumers and erodes trust in all ESG products,” said Sacha Sadan (photo), the FCA’s director of Environment Social and Governance. “Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.”
‘UK at the forefront’
The proposal “places 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 said.
The FCA on Wednesday proposed to introduce three sustainability labels in the UK: “Sustainable Focus”, “Sustainable Improvers”, and “Sustainable Impact”. Both the EU and US regimes only include two sustainable finance labels.
The UK proposal has also been eagerly anticipated by financial regulators and investment firms across Europe, where similar rules are being rolled out under the EU’s Sustainable Finance Disclosure Requirements, known as SFDR. The EU regime lets investment funds be classified as “light green/ESG” Article 8 or “dark green/impact” Article 9. There also is a “brown” Article 6 categorie for funds that do not have sustainability ambitions.
In the United States, the Securities and Exchange Commission is introducing its own regime for sustainable investments. Like the SFDR, the SEC foresees two types of investment funds: ESG-Focused and Impact. A third category, “Integration”, has no label but is seen as a fund that integrates ESG factors along non-ESG investments.
Consultation until January
The 179-page UK proposal includes a comprehensive outline of principles and key considerations for each of the different labels, including category-specific requirements and implementing guidance. It serves also as a consultation paper. Industry participants can provide feedback to the FCA until 23 January 2023.
A product with the UK’s “Sustainable Focus” label for example will need to demonstrate that it is aligned for “at least 70 percent” with assets that “meet a credible standard” for environmental and/or social sustainability. “Credible” here is defined as robust, independently assessed, evidence-based and transparent.
To obtain a “Sustainable Improvers” label, a fund needs to align its investments with assets “that have the potential to become more environmentally and/or socially sustainable” over time. A “Sustainable Impact” label requires products to demonstrate “a predefined, positive, measurable, real-world environmental and/or social outcome”.
With respect to a portfolio management agreement or arrangement, 90% of the total value of the products in which it invests must meet the qualifying criteria for the same label in order for it to use the label, the FCA said. The firm must then make the disclosures for each of the underlying products available to consumers.