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FCA adds greenwashing to sustainability KPIs

The UK regulator will measure performance on incidence of misleading ESG marketing and ESG mis-selling.

The Financial Conduct Authority (FCA) has included measures to tackle greenwashing in its key performance indicators for the coming year as part of wider plans to further embed ESG in its regulatory functions.

In a three-year strategy published Thursday, the UK regulator set out five ESG KPIs, including developing a way to monitor the “incidence of misleading marketing for ESG products” and a metric relating to “enforcement and supervisory cases of financial crime, fraud and mis-selling of ESG-related products”.

Regulators have been increasing their scrutiny of ESG products and managers over the past year. In November, the Swiss Financial Market Supervisory Authority released guidance on preventing greenwashing, while the Securities and Exchange Commission in the US and Germany’s BaFin opened investigations into DWS after its former head of sustainability alleged it was exaggerating its ESG capabilities – charges the asset manager denies.

The FCA is also working on regulation for sustainable fund labels. The authority launched a set of principles for ESG-labelled funds in July, which it said was prompted in part by the volume of poor-quality fund applications.

Other KPIs in the strategy include improvement in the quality and quantity of climate-related and sustainability disclosures. The FCA has been rolling out mandatory TCFD-aligned disclosures for much of the UK economy and financial sector over the past year, and requirements for the largest UK companies to disclose came into force on Wednesday. All companies required to produce a non-financial information statement, as well as some smaller companies and unlisted firms above a certain size, will be required to produce a TCFD report. The government estimates around 1,300 companies will be covered.

The regulator will also measure its performance against levels of consumer trust in ESG products and is developing a metric to evaluate stewardship effectiveness. The FCA said it would work with other regulators and industry leaders to develop the stewardship metric, looking at how investor engagement and the exercise of shareholder resolutions and voting are used to encourage positive ESG outcomes.

The Financial Reporting Council, which oversees the UK’s stewardship code, released its three-year plan on Tuesday. The regulator, which is being given strengthened powers and reformed into the Audit, Reporting and Governance Authority, intends to increase its focus on non-financial reporting standards and environmental and climate reporting.