Sadan: Let’s stop the cycle of greenwashing

The FCA's head of ESG explains the thinking behind the proposed labelling regime for UK sustainable funds.

Sacha Sadan

For many savers, investing in a more sustainable future is just as important as returns. To me the word sustainable means repeatable and enduring. Funding of growth projects can not only be profitable, but also support a better world.

That’s why it saddens me when I see products that talk the talk on sustainability issues, but on closer examination fail at the first hurdle and tarnish the industry. It’s not only a betrayal of investors’ expectations, but a missed opportunity to use their funds to support the long-term development of infrastructure, technology and solutions to some of the world’s largest problems.

While it is excellent that firms are offering a diverse set of ESG (environmental, social and governance) investment opportunities, it can be confusing when terms like “ESG”, “green” and “sustainable” are being used interchangeably. And some claims don’t stand up to closer scrutiny.

Because some ESG products are not what they appear, greenwashing can erode trust in the market for sustainable investment and risk slowing the flow of much-needed capital to drive positive change. Just last month, Boring Money’s survey found a severe lack of confidence in sustainable funds among retail investors, with some 86 percent not confident in how to invest or who to trust.

At the FCA, one of our main objectives is to protect consumers – and we set the high standards needed to ensure this happens. We also aim to promote effective competition in the interests of consumers. We’re not here to make value judgments about what people should invest in – that is their choice. We simply want to ensure transparency and comparability and help to rebuild trust.

That’s why we are proposing measures that aim to protect consumers from unsubstantiated sustainability-related claims and help them understand what they’re investing in.

We’re reiterating existing requirements that sustainability claims must be clear, fair and not misleading – and going further by proposing a set of new rules.

At the core of our proposals is a labelling regime – starting with UK-based funds and portfolio management.

We know from our consumer research that labels can help consumers better understand what a product is doing. So, we have worked with industry to develop three labels that will help consumers to navigate the market and distinguish between different types of “sustainable” product based on the outcomes they are seeking to achieve.

Our proposed “Sustainable Improvers” label tells consumers that these products invest in companies that are on a path to becoming more sustainable. This is key to supporting the sustainable transition. And together with disclosures – which we’ve designed specifically to be simple and accessible to consumers – they will be able to track progress and challenge the asset manager.

For finance to support a more sustainable future, we need to legitimise the journey. Excluding or divesting from entire sectors, such as oil and gas, fails to recognise the important role that companies in these sectors may play in transitioning the economy. Stewardship engagement can help investors influence investee companies to do better and hold them to account for their future plans.

Our two other proposed labels also reflect the differences in consumers’ ESG preferences. Some may only want to invest in assets that are already sustainable, having a “Sustainable Focus”, and others may want to invest to achieve a positive, real-world “Sustainable Impact”, like increasing renewable energy through financing the construction of a wind farm.

Firms will need to clearly show what sustainability aim the product is looking to achieve. For instance, how their investment policy and strategy, their resources, and their stewardship support that goal, as well as ongoing performance against it.

Supporting firms is key. We’ve worked hard with the industry on these proposals and will continue to work with firms to make these changes a reality.

Through collaboration with industry we can rebuild consumers’ trust in the market for sustainable investment. We want a future market where people aren’t dazzled and misled by greenwashing but have the confidence to say their money is being invested the way they expect it to be and, hopefully, support the flow of capital towards a better future for us all.