The Financial Conduct Authority (FCA) published the ‘Sustainability Disclosure Requirements and investment labels Consultation Paper’ in October 2022. This followed a Dear Chair letter and Discussion Paper and as expected, aligns itself with Policy Statement PS22/101 *, but with a focus on the marketing of sustainable investment products to consumers. Tara Swaminathan and Oliver Wannell review the proposed changes.
ESG investing – sometimes referred to as socially responsible investing (SRI) – has grown considerably in recent years, with socially conscious investors choosing products that have a positive environmental or social outcome, beyond a pure financial return. Regardless of whether you consider ESG investments as “falling short of your expectations” , or a “darling of the investment world” , the increased popularity in SRI, undeniably, shows a change in priorities and attitude of the current-day investor.
The FCA considers that this growth in SRI has led to some firms making exaggerated or unsubstantiated claims about the sustainability or ESG outcomes of their investment. Its concerns are primarily on the ‘greenwashing’ of investment products, with firms carrying out this practice in a bid to attract more socially conscious investors. According to the FCA, this practice threatens to undermine the trust between investors and firms and the integrity of the ESG sector as a whole.
Trust and integrity underpin the investment market, especially the retail investment market. This, contextually, supports the work the Government is doing in relation to the Financial Services and Markets Bill (FSM Bill) and the Edinburgh Reforms, with a key area of growth being investment and capital markets. For the FCA, alongside the concerns of harm to consumers, it says that if “consumers can’t trust the claims firms make about their products, they will shy away from this market, slowing the flow of much-needed capital to investments that can genuinely drive positive change”.
The FCA’s 2021 publication ‘A strategy for positive change: our ESG priorities’ reinforces the FCA’s current approach. The FCA considers that financial services sector could be a “force for good”, with institutions having a voice, influence and sway to encourage positive change, whilst supporting the transition to a net zero economy.
In its latest Consultation Paper, the FCA highlighted two main issues with the ESG investment products market:
The FCA provided further commentary on why consumer and market harms arise in this area, identifying the following issues:
To tackle this, the FCA is looking to introduce the following new measures:
The proposed rules are aimed largely at asset managers of products falling within the scope of the consultation, and those that distribute those products to retail investors. Some provisions, including the ‘anti-greenwashing rule’, will apply to all regulated firms. As the rules are at the consultation stage, there is further scope for the measures to be extended to regulated asset owners in relation to their investment products.
The consultation closed on 25 January 2023, with final rules currently expected to be published by 30 June 2023.
The FCA plans to introduce the anti-greenwashing rule immediately after publication, whilst the remaining rules (labelling, disclosures and distribution) are expected to apply from 30 June 2024 onwards.
* This policy statement is the ‘Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions’
* The three labels are (i) sustainable focus; (ii) sustainable improvers; or (iii) sustainable impact.