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FCA Issues Sustainable Investment Product Rules and Addresses Greenwashing

A set of measures aimed at assisting investors in evaluating the sustainability attributes of investment products and funds and avoiding the risk of greenwashing were released by the Financial Conduct Authority (FCA), which is responsible for overseeing the conduct of financial services firms and financial markets in the United Kingdom.

The new regulations, according to the FCA, are a response to investors’ growing desire for investments that have a positive social and environmental impact. Global AUM in ESG-oriented funds is expected to reach $36 trillion by 2026, and 70% of investors say they don’t trust the sustainability claims made by investment products.

The proposed measures encompass an anti-greenwashing regulation that pertains to all communications made by FCA- authorized companies regarding the environmental or social aspects of financial products or services. The objective is to guarantee that the statements made are truthful, transparent, and devoid of deception, and aligned with the product or service’s sustainability profile.

According to the new policy document, the anti-greenwashing rule will go into effect at the end of May 2024, and businesses will be able to start using the labels by the end of July 2024. Naming and marketing regulations will follow in December 2024. Large companies will have to start requiring ongoing product-level disclosures in December 2025, followed a year later by smaller companies.

The FCA rules introduce four labels intended to help consumers to differentiate between the sustainability objectives and investment approaches of investment products. 

These include,

  • Sustainability Focus, for products that aim to invest in assets that are environmentally and socially sustainable; 
  • Sustainability Improvers, investing in assets that have the potential to improve environmental and/or social sustainability over time; 
  • Sustainability Impact, investing with an aim to achieve a predefined positive and measurable environmental or social impact, and; 
  • Sustainability Mixed Goals, a newly introduced category for funds that invest across different sustainability objectives and strategies aligned with the other categories. 

The regulations stipulate a number of requirements for products to use the labels, such as that pre-contractual and continuing product-level disclosures for products utilizing a label be made, and that at least 70% of the product’s assets be invested in accordance with the label’s aim.

Implementation timelines outlined in the new policy paper begin with the anti-greenwashing rule, which comes into effect at the end of May 2024, with firms allowed to begin using the labels at the end of July 2024, and naming and marketing rules coming into force in December 2024. Ongoing product-level disclosures will be required by large firms from December 2025, and smaller firms a year later.