Fighting Greenwashing: The FCA Releases Rules For Sustainable Investment Products

Fighting Greenwashing: The FCA Releases Rules For Sustainable Investment Products

Regulators' battle against greenwashing continues. Last week, the UK’s Financial Conduct Authority (FCA) announced the release of the new Sustainability Disclosure Requirements (SDR) for asset managers and investment products. The new rules include a thorough assessment of the ESG nature of investment products and funds to lower greenwashing risk in financial markets.

The new rules follow a global effort to bring consistency to sustainability claims and green labels for investment funds and products. In June 2023, the ISSB – backed by the G20 – released universal climate and sustainability standards to ensure the accuracy of ESG-related information in financial markets. Following suit, the FCA’s new SDR includes four labels to help customers identify the ESG-alignment of sustainability financial products: 

• Sustainability Focus: products that invest in assets designed to improve ESG and sustainability issues over time.
  
  
• Sustainability Improvers: products that might not be sustainable now but have the potential to improve ESG performance over time.
  
  
• Sustainability Impact: products targeted at achieving a positive and measurable environmental and social impact.
  
  
• Sustainability Mixed Goals: products that include different sustainability goals aligned with other portfolio strategies. 

While the FCA hasn’t designated a hierarchy to these labels, consumers may prefer ‘sustainability impact’ products over ‘sustainability improvers’ based on their needs and goals. Additionally, these labels are subject to specific criteria, including a requirement for at least 70% of the assets to be invested following the label’s objective, as well as a mandatory product-level disclosures based on labels’ specifics. Investment professionals will need to seek access to granular ESG data on their portfolio and implement the right tools and processes to assess sustainability claims and mitigate greenwashing risks. This will push the demand for digital tools targeted at financial markets – such as S&P, Position Green and Pulsora – that ease access to ESG financial information, which is fundamental to fit the sustainability labels’ criteria.

The FCA’s rules push the financial market into transformational processes that include valuing ESG as a key factor for financial performance. In other words, organizations must take proactive steps to ensure a strong integration between ESG and financial factors. The FCA’s new rules will affect not only the content and goals of investment funds but also how firms disclose financial information related to ESG topics. Hence, we can expect more scrutiny on marketing materials, client engagements and product governance, as internal and external stakeholders will increasingly demand consistency and transparency on the ESG-alignment of financial products. 

As regulators and shareholders raise transparency standards, organizations must implement internal systems, controls and digital strategies that protect the integrity of sustainability claims. If you’d like to learn more about how to integrate ESG and financial performance, see Verdantix Strategic Focus: Integrating ESG into Financial Disclosures. If you’d like to learn more about market-leading ESG digital tools for financial markets, look out for the upcoming Verdantix Smart Innovators: ESG Reporting and Data Management Software For Investors.