Regulators on both sides of the Atlantic continue to have greenwashing firmly in their sights. In the UK, the FCA has just proposed a set of rules that aim to tackle greenwashing, specifically focusing on the labelling or naming of investment products. The FCA is concerned about “exaggerated, misleading or unsubstantiated claims about ESG credentials”. A recent ruling from advertising watchdog the ASA penalising HSBC for “unqualified claims” about the environmental credentials of its investment activity provides an example of where complaints about potential greenwashing have been ultimately substantiated by regulators.

The FCA’s proposal creates the concept of a “sustainability label” (label), which firms are only able to use where they are undertaking business that is considered a “sustainability in-scope business” in relation to a “sustainability product”. The FCA explicitly states that the use of this new label must not be misleading.

Record-keeping

There is an interesting record-keeping angle here as well as firms are required to prepare and retain a record documenting the basis on which such a label has been employed. That record must be maintained for the duration of its use and must maintained during this period – in other words it must reflect any changes should the use of the label change.

Another aspect directly connected to this new labelling mechanism is the intent, by the FCA, to “add more specificity to both product- and entity-level disclosure requirements as the ISSB develops its sustainability disclosure standards”. The FCA wants to flesh out the disclosure requirements needed to qualify a business or product as sustainable on the yet-to-be-adopted IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information. This proposed standard is now formally cited in the rules as a document that is relevant to a firm determining the content of its sustainability disclosures.

The FCA intends to “add more specificity to both product- and entity-level disclosure requirements as the ISSB develops its sustainability disclosure standards”.

In an attempt to address the fact that the standard is not yet available and has not been adopted in the UK – and also as a tacit acknowledgement of the current absence of consensus in this area – the FCA is, for the present moment, pointing firms to SASB metrics when making “sustainability-related disclosures”.

The moves by the FCA mirror those made by the SEC earlier this year. In May the SEC proposed rule changes that aimed to prevent the use of misleading or deceptive fund names which bring into scope names that indicate a fund focus on ESG issues. In the SEC’s view the name of a fund “is an important marketing rule” and “can have a significant impact on investors’ decisions when selecting investments”.

Investor protection

As with the FCA’s proposals the main regulatory thrust here is consumer and specifically investor protection. The SEC’s proposal has received some vocal support from public interest bodies. But it has also been met with some trepidation from key financial players. This is clearly visible in a number of responses to the proposals urging the SEC to reconsider aspects of the proposed rules and specifically the expansion of the rule to cover investment objectives and strategies connected to ESG factors.

A common thread between the comments from those worried about the impact of the new rules on ESG branded products is the worry about the potential for the stifling effect on financial product innovation. The concerns stems directly from the fact that there still is very little consensus around ESG factors, their reporting and especially their objective measurement.

Many of the commentators point to the continuing subjective nature of the assessment of ESG factors.

Many of the commentators point to the continuing subjective nature of the assessment of ESG factors. Another criticism has been that, as drafted, the proposed rules apply to some funds but not others, which, the critics argue, could actually lead to investor confusion. 

While the consultations and debates are still ongoing, what is clear is that the regulation in this area is likely going to become more complex very quickly – particularly if the assorted ESG reporting rules being authored by ESMA, ISSB and SEC are actually adopted. We will be observing the developments very closely.