According to the Financial Conduct Authority (FCA), UK consumer confidence in ESG-related or sustainable investment products has been negatively impacted by investment firms’ propensity to make exaggerated, misleading or unsubstantiated sustainability-related claims about their products (whether intentionally or unintentionally). Such misleading practices are known as ‘greenwashing’.
This article follows the recent ruling by the Advertising Standard Authority (ASA) that HSBC misled consumers in two UK high-street adverts in October 2021 in relation to its ‘green’ credentials. The ASA had received 45 complaints that HSBC was engaged in selective advertising whilst failing to acknowledge its own contribution to carbon dioxide and greenhouse gas emissions. The ASA’s ruling was the first instance of a complaint for greenwashing by an advertiser in the UK financial industry being upheld.
Seeking to combat this phenomenon of greenwashing, on 25 October 2022 the FCA published a consultation paper, CP22/20, on Sustainability Disclosure Requirements (SDR) and investment labels. This consultation paper follows the FCA’s discussion paper which set out its early stage views on these initiatives in November 2021 – itself precluded by the government’s ‘Roadmap to Sustainable Investing’ which was issued in October 2021 and which introduced its plans to implement the SDR and an investment labelling regime across the UK financial market.
The policy rationale behind the FCA’s consultation paper is to provide assistance to consumers and institutional investors in identifying sustainable investment products and thereby to navigate the financial markets more effectively. Its proposals seek to address the risk of greenwashing and restore consumer faith in UK investment firms.
The SDR have been designed to facilitate more accurate representation of financial products that are claimed to be sustainable, through the introduction of labelling and disclosure requirements. Specifically, the consultation paper proposes the following:
Three sustainable investment product labels
- ‘Sustainable focus’: investments in assets that are environmentally and/or socially sustainable. In order to qualify for this label, at least 70% of the product’s assets must either meet a credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme.
- ‘Sustainable improvers’: investments aimed at improving the environmental and/or social sustainability of assets over time. These products are invested in assets that are selected for their potential to become more sustainable over time, including in response to the stewardship influence of the firm.
- ‘Sustainable impact’: investments in solutions to environmental or social problems, with the explicit objective of achieving a positive, measurable contribution to sustainable outcomes.
Consumer facing and detailed disclosures
The introduction of mandatory disclosure requirements is proposed, segmented into (a) consumer-facing disclosures and (b) more detailed and granular disclosures for institutional investors and other stakeholders (or retail investors interested in receiving more information).
The consumer-facing disclosures seek to help consumers understand the key sustainability-related features of a given investment product. It is proposed that these disclosures would be located on the relevant digital medium (eg website) at which the product is advertised, and would include the product’s sustainability objective, the investment approach, and the product’s performance against the objective. Investment firms would also be under an obligation to disclose and clearly signpost any ‘surprising’ holdings (in other words, those which are inconsistent with the sustainability of the product). It should be noted that these disclosures would be required for products with or without a sustainability investment label.
The more granular disclosures for institutional investors and other stakeholders would require a higher level of technical detail to be contained within pre-contractual disclosures (ie the prospectus, information memorandum or KIID), including outlining the sustainability-related features of a product (as detailed in the paragraph above), in addition to annual sustainability product level and performance reports, and entity-level disclosures to analyse how firms are managing sustainability-related risks and opportunities. This latter requirement, contained in a ‘sustainability entity report’, would apply to all firms managing UK investment funds with assets under management (‘AUM’) of £5 billion or more on a three year rolling average, and would be applicable to firms with or without a sustainable investment level.
Naming and marketing rules
The prohibition of the use of ‘sustainability-related terms’ – such as ‘ESG’, ‘green’ or ‘sustainable’ – in the naming and marketing of investment products is proposed. This prohibition would apply to any investment products which do not make use of one of the three sustainable investment labels set out above.
Requirements for distributors
It is also proposed to introduce rules in relation to firms which distribute certain investment products to retail investors (including platforms and advisers). These rules would require distributors to make the sustainable investment label and consumer-facing disclosures that would be required under the SDR available to those retail investors.
Finally, a ‘clarification’ is proposed, applicable to all FCA-regulated firms in respect of all products and services, that sustainability-related claims must be ‘clear, fair and not misleading’. This proposal reiterates the FCA’s position and existing rules, and establishes a clear intention to combat greenwashing among advertisements for financial products.
The consultation paper notes that the FCA has ‘as far as possible” sought to achieve coherence with similar initiatives such as the proposals by the Securities and Exchange Commission (SEC) in the United States of America and the EU’s Sustainable Finance Disclosure Regulation (SFDR). The key difference, however, is that the US and EU regimes principally categorise investment products in order to determine disclosure requirements; in contrast, the starting point of the SDR relates more fundamentally to consumer confidence in UK investment firms’ practices, which is likely to lead to product labels with higher eligibility thresholds.
The FCA has invited views on the consultation paper from stakeholders as part of a formal public consultation which is open until 25 January 2023, with the stated intention of publishing its final rules during Q2 2023. Given the FCA acknowledges that many of the proposed rules will require further time for implementation on the part of market participants, it proposes that the labelling, naming and marketing and initial disclosure requirements would not come into effect any earlier than 30 June 2024. It is proposed, however, that the ‘anti-greenwashing rule’ within the consultation paper will be effective as soon as the relevant policy statement is published, which is expected in June 2023, since this rule is simply intended to clarify existing obligations rather than to introduce any new requirements.
This article was co-written with Sophie Newman, trainee solicitor in the commercial dispute resolution team.