The FCA has proposed several fund marketing rules in a clampdown on greenwashing.

The proposals include introducing sustainability labels on investment products and restricting how terms including ESG, green and sustainable can be used on those that do not qualify for the labels.

The labels would cover three categories:

• Sustainable focus, for funds investing in environmentally or socially sustainable assets.
• Sustainable improvers, for funds aiming to improve the environmental or social sustainability of their assets over time.
• Sustainable impact, for funds investing in solutions to environmental or social problems to achieve a positive, measurable real-world impact.

In addition, the measures would require standardised disclosures to aid retail investors’ understanding of a fund’s sustainability, including unexpected holdings. Among the requirements to be stated are:

• Sustainability goal: Asset managers must state the fund’s objective, how this is expected to affect returns, and ‘describe progress towards the sustainability objective, eg examples of actions taken and interim goals achieved’.
• Sustainability approach: Firms must summarise the investment strategy and explain the reasons for inclusions and exclusions. The strategy must be explained in plain English.
• Unexpected investments: Firms must clearly signpost any holdings that could be ‘surprising’ to investors given the focus of the fund.
• Sustainability metrics: Firms must show how they measure the success of their investments in relation to the sustainability goal through metrics and key performance indicators.

More detailed disclosures must be provided for institutional investors and retail investors who want to know more.

Platforms would be required to ensure that all of the above is accessible and clear.

Tackling a lack of trust

The regulator said the measures were designed to protect consumers and improve trust in sustainable investment products.

There has been a boom in the number of ESG funds in the market in recent years, raising concerns about a rise in greenwashing.

Sacha Sadan, ESG director at the FCA, said: ‘Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are.

‘Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges.

‘This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.’

Becky O’Connor, head of pensions and savings at Interactive Investor and author of The ESG Investing Handbook, said the proposals were a necessary and positive intervention.

She believes the FCA’s measures should go a long way to restoring faith and eliminating misleading marketing of financial products.

‘Investors who want their money make a difference need to be able to trust that the investment they are buying does what it says on the tin,’ O’Connor said.

‘With so many different and often conflicting rating systems and definitions currently floating around, it can be hard to know what investments are truly helping the planet and easy to lose faith in the whole idea of sustainable investment.’

In Citywire’s CEO Summit earlier this year, fund bosses warned a greenwashing danger was on the horizon, with a shift to Article 8-labelling spelling danger for some.

In September, analysis from FE Fundinfo suggested that around one in four ESG fund units marketed under the EU’s deepest-green Article 9 label are at risk of being stripped of the designation.