Will the FCA’s anti-greenwashing rule be enough to rebuild trust in sustainable investing?

Early signs are the rule will change behaviour, according to the AIC’s Nick Britton

Nick Britton


Nick Britton, research director, Association of Investment Companies (AIC)

Trust in sustainable investing is broken. That may seem a melodramatic statement, but it is borne out by the facts: more than six in ten private investors are concerned about greenwashing, and 0% of advisers and wealth managers “completely trust” funds’ sustainability claims, according to our ESG Attitudes Tracker.

One wealth manager interviewed for the survey doesn’t mince his words. He says greenwashing “is dreadful and I think it is going to get worse. It is so bad. It infuriates me. I end up arguing with friends who work in other parts of finance.”

Admittedly, not everyone is losing their friends over this. Scepticism, verging on cynicism, is the predominant emotion. “This is perhaps a bit cynical but I think a lot of the financial sector is seeing [ESG] as a bit of an opportunity really,” says one adviser.

It’s hard to deny this last statement. The Financial Conduct Authority‘s (FCA) “dear chair” letter of July 2021 highlighted the regulator had seen “numerous applications” for funds with an ESG focus, which “often contain claims that do not bear scrutiny”. It did not stop investors piling in: sustainable funds attracted net flows of £37.1bn in 2021, according to Morningstar data for the UK.

It wasn’t long before clouds started to gather. Higher inflation and interest rates darkened prospects for sustainable funds just as their rationale and credentials began to be questioned. In early 2022, Morningstar kicked more than 1,200 funds out of its European sustainable investments list, citing “ambiguous language in their legal filings”. The same year saw hundreds of “dark green” Article 9 funds downgraded by their providers to “light green” Article 8. Fears of “greenwashing” – a word that hadn’t even appeared in the “dear chair” letter – were now mainstream, threatening to scupper what some had thought of as the unstoppable rise of ESG.

Regulation to the rescue?

Last week, the FCA released guidance on its anti-greenwashing rule, which we’ve known about since November but comes into force on 31 May. The regulator hopes that the rule will repair investors’ trust in sustainability claims, ensure a level playing field for firms and increase market confidence, removing a barrier to the flow of capital into sustainable finance.

But will it work? There is already an obligation for firms to be “fair, clear and not misleading”. The anti-greenwashing rule is intended to ensure this obligation is viewed through a “sustainability lens” – but in theory it is only clarifying an existing requirement, rather than creating a new one.   

Reaction from our members has been generally positive. Rob Guest, co-manager of Foresight Sustainable Forestry Company, said as the rule becomes established it will increase confidence and may even encourage more corporates to adopt robust sustainability frameworks as part of their standard reporting procedures.

Eleanor Fraser-Smith, head of sustainability at Victory Hill Capital Partners, pointed to the impenetrable complexity of some ESG disclosures as a key barrier to building trust. She believes regulations that support fair, clear and not misleading communications are important.

One sign that firms are taking the anti-greenwashing rule seriously is that they have repeatedly asked the FCA to push back the implementation date, both in response to the original Sustainable Disclosure Requirements (SDR) consultation in 2022 and the guidance consultation last year. The regulator originally wanted the rule to come in at the same time as its policy statement on SDR in November last year, but extended this to the 31 May. It has declined to grant firms any further time to prepare, despite requests to delay it to December.

The content of the FCA’s guidance also suggested there will need to be some changes in the way information is disclosed. The guidance said sustainability disclosures should be clear and understandable, for example (a nod to the Consumer Duty). That will be a challenge when many current disclosures are replete with jargon and acronyms, as Fraser-Smith pointed out.

One striking aspect of the guidance is a claim may be factually correct, but the overall impression it gives could still be misleading. That’s because images, logos and colours form part of the overall impression and could be used to exaggerate or misrepresent sustainability credentials. Expect to see less green and fewer pictures of trees in annual reports.

Finally, claims should be capable of being substantiated. There is no requirement to publish evidence, but firms should consider it, said the guidance. Either way, the implication is the evidence needs to be there.

The anti-greenwashing rule is an important component of SDR. While it may not be enough to restore confidence on its own, it gives the regulator a big stick – or as they put it, “an explicit rule on which to challenge firms”. It also gets to the heart of many investors’ concerns that they cannot trust what they are being told about ESG. Early signs are that the rule is being taken seriously and we should expect to see changes.

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