UK Financial Watchdog Introduces New Framework to Combat Greenwashing in ESG Funds

New Measures to Protect Retail Investors

The UK’s Financial Conduct Authority (FCA) has unveiled a comprehensive framework aimed at shielding retail investors from misleading environmental, social, and governance (ESG) claims. This initiative introduces an explicit anti-greenwashing rule, product labels to clarify a fund’s sustainability goals, and marketing requirements to prevent the promotion of non-existent sustainability objectives.

Response to ESG Fund Concerns

Sacha Sadan, director of the FCA’s environmental, social and governance unit, acknowledged the increasing concerns about exaggerated sustainability claims by some firms. In contrast to the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which has faced criticism for its lack of clarity and user-friendliness, the UK’s approach aims to provide a more straightforward and understandable rulebook.

ESG Fund Labels and Sustainability Disclosure Requirements

The FCA’s strategy, part of its Sustainability Disclosure Requirements, will introduce four ESG labels. These labels will help investors understand if a fund meets their investment needs and include categories such as Sustainable Focus, Sustainable Improvers, Sustainable Impact, and Sustainability Mixed Goals. Funds can use these labels if at least 70% of the gross value of a product’s assets align with its sustainability objective.

International Implications and Compliance

The FCA’s new rules are expected to influence not only UK market players but also international ones, particularly the EU. With around 630 UK-based funds likely to be affected by the labelling, naming, and marketing rules, asset managers operating in Europe may face complexities in complying with two major ESG regulatory frameworks.

Industry Reception and Implementation Timeline

The introduction of these measures has been positively received by industry leaders. Peter Harrison, CEO at Schroders, and Joseph Pinto, CEO at M&G Asset Management, welcomed the new regulations, noting their potential to enhance market confidence and protect consumers, while fostering product innovation within the asset management industry. The anti-greenwashing rule will take effect at the end of May, with the labelling framework becoming operational at the end of July.

Future Developments and Advisory Group Formation

The FCA also plans to establish an independent working group within the financial advice industry to further develop sustainable finance capabilities, aligning with the SDR and labels regime. This group will focus on building on existing sustainable finance capabilities and how the new regulations support their roles.