The FCA is quite right to tackle greenwashing with its forthcoming guidance. Greenwashing is an unhelpful distraction from the genuine problems that need decisive solutions.
It is quite difficult to greenwash in real estate. That’s because the investment is the building itself, which means carbon emissions, waste production and energy and water consumption can be easily monitored. This also makes it easier for real estate managers to substantiate claims about their sustainability efforts and use this new guidance.
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The guidance includes a series of labels. It’s an approach we’ve seen before – sometimes leading to unintended consequences. For example, the EU Sustainable Finance Disclosures Regulation, tended to make it difficult for a fund engaged in transition work to meet a label definition.
But there’s reason to be optimistic now. The FCA labels are voluntary, not compulsory, so firms are unlikely to pick, say, the ‘Sustainability Focus’ label unless they are certain the threshold can be met. The FCA has clearly learned the importance of encouraging transition activity, such as retrofitting.
This is a crucial issue.
Real estate as an industry emits around 40% of global carbon emissions. Its transition must be financed. The majority of the buildings we will have in 2050 already exist today, so the way to net zero is not about demolishing buildings to create carbon-neutral ones in their place; it is about upgrading – or retrofitting – existing assets.
Here, the FCA has introduced the ‘Sustainability Improvers’ label, which allows for assets in a portfolio that may not be sustainable now, but will be over time, once improved. You can also have two labels – so once you’ve improved your fund, you can switch to a ‘Focus’ label.
The anti-greenwashing rule applies to all funds, retail and institutional. A lot of our institutional members have been talking about these labels, and while they haven’t explicitly said they would use them, they acknowledge it is a good way to show what they’re doing – especially if they do it on a voluntary basis.
When we responded to the FCA consultation on the guidance, last year, we highlighted some investments can only afford limited control or influence. For example, you might invest in a listed company or a fund, and you don’t have control over what the management team does. Multi-managers invest in funds that buy properties receive reporting from the underlying fund. They monitor what the fund is doing, but ultimately the multi-manager has no direct control.
So, if the fund fails to carry out a plan, the multi-manager can’t change that, but must still report on it. This is why we don’t want the FCA to penalise multi-managers, but to consider those who do not have direct control or influence.
The real estate investment industry is in a position where firms must already substantiate claims made about financial performance – especially if their products are aimed at consumers. The new guidance shouldn’t be a challenge for those good managers who are used to measuring, assessing and reporting on this type of information already.
The FCA has a deadline of 31 May, which doesn’t allow much time for changes to be made. The next step will see the regulator evaluating responses and then either issuing the guidance, possibly with the incorporated feedback, or they may issue a new, updated proposal.
The FCA has been especially engaged on ESG and net-zero issues, and has been responsive to the industry.
We’re optimistic the guidance will be welcome – and help focus industry efforts on playing its role in the transition, while still delivering for clients.
