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Asset managers in the UK will be banned from using vague references to “sustainability” to market their funds, under new anti-greenwashing rules that could lead to a significant shake-up of the $250bn sector.
The Financial Conduct Authority said its regime laid out on Tuesday, two days before the start of the global COP28 climate summit in Dubai, was intended to make sure products marketed as helping either people or the planet were “clear, fair and not misleading”.
From December next year, asset managers who market their funds as sustainable will have to choose one of four specific fund labels and demonstrate that they apply to at least 70 per cent of their assets.
Funds that use these labels or that make any sustainability-related claims in marketing will have to publish a two-page summary for retail clients of their evidence-based stewardship strategy and “theory of change”, based on an independently assessed standard such as a greenhouse gas target or alignment with the EU’s taxonomy, or dictionary, of green activities.
This approach could in future be extended to portfolio managers, overseas funds, pension products and financial advisers, the FCA said.
In addition, from May next year, all FCA-authorised companies will be subject to anti-greenwashing rules building on a requirement that the marketing of financial products and services should be correct, clear, complete and fair. A financial institution should not, for example, place an image of a rainforest at the top of its website if only some of its savings products are invested in a way that creates positive change for the planet, the FCA said.
There are currently $242bn of funds in the UK marketed as “sustainable”, according to data provider Morningstar Direct, compared with $290bn in the US and nearly $2tn in the rest of Europe. Until now, the asset management industry has largely been given a free hand to apply this label and to use green marketing terms to attract retail investors with little oversight from regulators.
The four new categories proposed by the FCA apply to funds that invest in companies that meet a “credible” environmental or social standard, have the potential to improve against this criteria, invest in tangible solutions to problems affecting people or the planet, or a mixture of these.
The new regulatory certainty will probably spur asset managers to launch new green funds in the coming year, but could also lead to “more enforcement action against funds that are probably greenwashing”, said Gavin Haran, head of policy for asset management at London-based law firm Macfarlanes.
Sacha Sadan, head of environmental, social and governance issues at the FCA, said that the regulator was the first in the world to mandate the use of regulated labels for funds claiming to be sustainable, and that it had learnt from stumbling blocks faced by its counterparts in the EU.
Europe’s top asset managers last year abruptly withdrew claims that tens of billions of dollars of funds met the most stringent sustainability requirements, after confusion surrounding the introduction of the bloc’s Sustainable Finance Disclosure Regulation.
The UK’s greater flexibility reflects an acceptance that investing in polluting clients rather than divesting from them is acceptable in sustainable strategies, as long as that approach is clearly disclosed. “It’s OK to stay,” Sadan said. “Whether it’s on climate, diversity or supply chains you can stay and show you are trying to influence and make the system better.”
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