The Financial Conduct Authority (FCA)’s Sustainability Disclosure Requirements (SDR) deadlines are fast approaching, and it is vital that financial advisers understand the measures that are due to come into effect in the coming months. However, I have had numerous conversations with advisers around their awareness and understanding of them – or often the lack thereof.
To recap, the key elements to be aware of are the anti-greenwashing rule which is coming into effect from 31 May 2024; the rules around naming and marketing and, of course, the sustainability labels for funds and consumer facing disclosures which will come into play later in the year.
Given the deadline is looming, let’s focus on the anti-greenwashing rule which impacts all FCA-regulated firms and advisers. In fact, am I allowed to say ‘impact’ given its connotations with impact investing? Given this context, of course I am, but did you know that some words are hot button issues?
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One of the key things to note is that certain terms with sustainability characteristics have further limitations on their use. If a fund manager uses these specific constrained terms in either the sustainability product’s name or in a financial promotion in relation to the sustainability characteristics of that product, they must ensure they are aligned to the disclosure documents:
‘ESG’ (or ‘environmental, social and governance’); ‘environment’, ‘environmental’ or ‘environmentally’; ‘social’ or ‘socially’; ‘climate’; ‘sustainable’ or sustainability’; ‘green’; ‘transition’; ‘net zero’; ‘impact’; ‘responsible’; ‘sustainable development goals’ or ‘SDG(s)’; ‘Paris-aligned’; and any other term which implies that a sustainability product has sustainability characteristics.
General use of these terms can be made in short factual statements, or to make statements in a context not intended to refer to or describe the sustainability characteristics of a sustainability product.
The anti-greenwashing rule seems eminently sensible. I for one have been concerned about how the phrase ‘impact’ has been thrown around to ‘greenify’ products and strategies where the outcomes are not necessarily associated with the intentionality and measurement one would expect from a true impact fund.
However, while this all seems very laudable, and of course our old friend Consumer Duty is being brought into the mix as well, I have a niggling concern that this might prompt firms to engage in ‘green-hushing’. By this I mean downplaying the extent of a firm’s stewardship and the integration of ESG factors into their operations. The concern is that firms may focus more on minimising risk mitigation and identifying opportunities rather than actual sustainability objectives and outcomes.
So how do you as an adviser navigate this?
First, it is important to first make sure your own house is in order. As a general rule, a firm – whether it is undertaking sustainability in-scope business or not – must ensure that any reference to the sustainability characteristics of a product or service is:
(1) consistent with the sustainability profile of the product or service; and
(2) clear, fair and not misleading.
So, whether or not you have a sustainability-oriented offering, you must ensure that the language and imagery you use is consistent with what is being offered. It is important to avoid bland statements and focus on specifics.
Then you should ask the managers you invest with what they are doing about the anti-greenwashing rule. At the most basic level is making sure imagery doesn’t convey a ‘greenness’ that might lull the unsuspecting into making assumptions about what is being marketed. Similarly, has a review taken place or is one planned for all collateral, viewed through the lens of Consumer Duty? What are their concerns? How are they approaching this across the firm, given it applies to all aspects not just financial promotions?
If you have clients in ‘sustainable’ products or strategies, it is a good idea to ask the manager about how they are approaching the anti-greenwashing rule as a starter for 10. Following that, you should delve into whether they intend to adopt a label for their products, and if not, then why not? It is worth noting that an absence of a label doesn’t inherently signal a red flag – for example funds that follow exclusionary criteria, which may well lead to them investing in a sustainable way, are not currently in the running to get a label.
Finally, one of the most important things to remember is to stop talking about ‘ESG funds’. This is a huge issue. By using a lazy term, assumptions are made about an investment – focus should instead be on what responsible investment characteristics an investment has, as well as what your client has a personal interest in. Are exclusions their biggest concern or is it more about risk mitigation through stewardship and ESG integration? Or is your client more outcomes driven and so sustainability or impact approaches would be more appropriate.
Ultimately, the anti-greenwashing rule is coming very soon, and the rest of the SDR measures will not be far behind, so it is vital you spend time now ensuring you understand the changes so you are properly equipped to support your clients when the time comes.
