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October 27, 2022

FCA proposes new measures to tackle greenwashing

In a bid to clamp down on greenwashing, the UK’s Financial Conduct Authority (FCA) is proposing a package of new measures including the use of sustainability labels on retail products.

By Michelle Russell

The measures set out this week by the Financial Conduct Authority are among several potential new rules designed to protect consumers and improve trust in sustainable investment products. 

The work forms part of the commitment made in the FCA’s ESG Strategy and Business Plan to “build trust and integrity” in ESG-labelled instruments, products and the supporting ecosystem.

The new measures may include restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used on products and labelling.

According to the FCA, there has been growth in the number of investment products marketed as ‘green’ or making wider sustainability claims.

“Exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products. The FCA wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have,” it adds.

A recent study carried out by international law firm RPC, found that five out of 21 allegations of greenwashing made to The Competition and Markets Authority (CMA) since the Green Claims Code was introduced in September 2021 related to the fashion industry.

Complaints include false or misleading claims about the use of recycled materials in a clothing line, claims that the clothing is manufactured in a “sustainable” way or that buying the product will be beneficial to the environment.

“Greenwashing misleads consumers and erodes trust in all ESG products,” says Sacha Sadan, 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. This supports investment in solutions to some of the world’s biggest ESG challenges. This 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.”

The FCA is proposing to introduce:

  • Sustainable investment product labels that will give consumers the confidence to choose the right products for them. There will be three categories – including one for products improving their sustainability over time – underpinned by objective criteria. 
  • Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which don’t qualify for the sustainable investment labels. It is also proposing a more general anti-greenwashing rule covering all regulated firms. This will help avoid misleading marketing of products. 
  • Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product – this includes disclosing investments that a consumer may not expect to be held in the product. 
  • More detailed disclosures, suitable for institutional investors or retail investors that want to know more.
  • Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.

The proposals have been informed by several inputs including industry feedback and consumer research. Contribution was also made by the DLAG (Disclosures and Labels Advisory group), an expert advisory group made up of key financial market stakeholders and subject matter experts.

The consultation is open until 25 January 2023. Final rules are expected to be published by the end of the first half of 2023.

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