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FCA’s new sustainability rules to establish UK as world leader on anti-greenwashing

The new rules aim to clamp down on greenwashing, when firms make exaggerated or misleading claims about the environmental credentials of their investment products.

Industry figures today claimed the UK was set to become a global leader in the fight against so-called greenwashing after the conclusion of a consultation by the financial regulator.

The new rules aim to clamp down on greenwashing, when firms make exaggerated or misleading claims about the environmental credentials of their investment products. 

The Financial Conduct Authority (FCA) proposals aim to build “transparency and trust” by introducing labels to help consumers navigate the market of sustainable investment products, in particular by ensuring the name reflects the sustainability profile of the product. 

UK Sustainable Investment and Finance Association (UKSIF)  – an industry body representing over 300 members with over £19trn in assets – said the rules represent an opportunity for the UK to establish “a world-leading regime”which could see the UK “proactively shape other countries’ approaches to disclosures and labelling in the coming years.”

Speaking exclusively to City AM, Chief Executive of UKSIF James Alexander said the conclusion of the consultation marks “an important milestone in advancing the UK’s objective to be a global leader in the fast-evolving sustainable investing market.”

Greater choice

Whereas the equivalent EU regulation – the SFDR – only has two categories of sustainable fund, the UK has three making it more differentiated and offering consumers more choice. 

The three labels are sustainable focus, sustainable improvers and, the highest label, sustainable impact. 

UKSIF praised the FDA’s stricter regulatory requirements as opposed to the EU’s “arguably looser criteria.”

However, Alexander noted that aspects of the qualifying criteria, particularly in the ‘Improvers’ category, require further discussion. 

The label is potentially a “world leader”, Alexander said, as it should establish a more rigorous definition for the bulk of investments which are neither completely green nor non-green. 

UKSIF’s “main concern”, however, is the prospect of “indefinite ‘non improving’” funds in this category over the long term.

“A very robust disclosures regime could help resolve interpretation issues for funds classified as ‘Sustainable  Improvers’,” UKSIF said.

Misalignment

The difference in regulatory labels may also impact investment funds with exposure to more than one regulatory regime. 

Director in sustainable finance at Anthesis Group – the world’s largest group of sustainability experts – Mike Jennings said: “It’ll be very interesting to see how the UK fund industry moves to three sustainability labels and how, in practice, that can be mapped onto Article 8 and Article 9 (the EU sustainability classifications). Funds may find it difficult to adjust to regulatory regimes where there is misalignment between the UK and EU.”

Nevertheless Jennings also stressed the overall benefits of having three sustainability labels, if regulated properly, as it will “help investors to differentiate between investment products with varying sustainability characteristics, and can reduce greenwashing by better disclosure”. 

Industry figures were quick to praise the consultation process with UKSIF and UK Finance both stressing the collaborative nature of the consultation.

“In contrast to other recent UK legal and regulatory reforms, the FCA’s proposals have been widely tested with interested parties and continue to evolve in response to feedback. And, importantly, the industry has actively and constructively engaged with the regulator throughout the process,” Simon Witney, Senior Consultant at Travers Smith commented.

Looking ahead, Alexander said he was “looking for progress from the government side to match the FCA’s ambition.”

The government’s green taxonomy – which outlines rules for companies and investors on green investments – was delayed in December. It is expected to come out in the next few months. 

The FCA will publish its final rules and guidance at the end of the first half of 2023.

The FCA declined to comment.

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