Regulators are cracking down on the use of terms such as “ESG”, “green”, or “sustainable”, in a bid to cut the risk of greenwashing in investment products.
The move comes from the Financial Conduct Authority (FCA) as concerns heighten around misleading claims about the credentials of some investment funds and their products.
The changes are aimed at helping consumers to “build trust” in the sustainable investment product sector, the FCA says.
Sacha Sadan, a former governance specialist at Legal & General Investment Management and now director of ESG at the FCA, says consumers need to be confident their investment products are as sustainable as they claim. “This supports investment in solutions to some of the world’s biggest ESG challenges,” he says.
The FCA is planning the introduction of “investment product labels”, tighter rules on how terms like “ESG”, “green” and”sustainable” can be used. And there will be a “more general” anti-greenwashing rule covering all regulated firms.
Strategic considerations
The scale of ESG investment potentially makes greenwashing an acute issue. PwC, a professional services firm, estimates ESG assets under management will reach $33.9tn by 2026, around a quarter of all assets.
The firm tells investment managers that one of their top ten strategic considerations is how they might respond quickly to claims of greenwashing.
Although there has been a great expansion of ESG investment, some reports suggest the creation of new funds has dropped significantly because of fears about scrutiny.
Worries about greenwashing have grown in recent months as watchdogs around the world take steps to ensure investment managers deliver on their promises.
In May, German regulators raided the offices of DWS, Deutsche Bank’s fund management arm, over concerns about greenwashing. This week a consumer group said it would sue DWS over greenwashing allegations, though the fund denies all the claims.
Warnings
Last week, HSBC was censured by the Advertising Standards Authority over adverts making sustainability claims.
In July, warnings were issued to UK firms about the risk of greenwashing. Emma Howard Boyd, chair of the Environment Agency and interim chair of the Green Finance Institute, said climate change was causing greater scrutiny of sustainability claims made by companies. “If we fail to identify and address greenwashing, we allow ourselves false confidence that we are already addressing the causes and treating the symptoms of the climate crisis,” she said.
“Greenwashing makes it more likely that we won’t realise this deception until it is too late. Companies that believe their own greenwash are embedding liability, storing up risk for their investors.”
As the pressure to become ever more green, so the temptation to play fast and loose with public claims is likely to grow. Regulators are therefore likely to increase their vigilance for greenwashing. The future of the planet might depend upon it.