The City regulator wants to crack down on the business of making conventional investments appear "greener" than they really are.

The UK’s main financial watchdog, the Financial Conduct Authority, is proposing measures to thwart greenwashing at a time when a number of firms have been scolded for the practice.

The FCA said measures will include investment product sustainability labels and restrictions on how terms such as “ESG,” “green” or “sustainable” can be used.

The measures are among several potential new rules which will protect consumers and improve trust in sustainable investment products, the FCA said.

“There has been growth in the number of investment products marketed as ‘green’ or making wider sustainability claims. Exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products,” the FCA said.

Figures in the wealth sector have welcomed the move.

“Today’s consultation paper from the FCA is an important step forward to helping provide consumers with the necessary protections and boundaries when it comes to responsible investment,” Beth Lloyd, head of responsible wealth management strategy at Quilter, said. 

“The lazy labelling of investment products as ‘ESG’ has not been helpful of late and has caused increasing confusion both to consumers and across the industry,” Lloyd said.

A few days ago, the Advertising Standards Authority banned two adverts used by HSBC to tout its green credentials. Regulators in the US have reportedly probed DWS, part of Deutsche Bank. (DWS has denied any wrongdoing.) As more and more banks and wealth managers seek to present their ESG credentials, there are worries that some of this activity is little more than spin or “virtue-signalling.” 

Ironically, some critics have argued that “woke” corporations are using “sustainability” ideas to mask poor profitability or lack of new products and services. Regulators in a number of jurisdictions, such as the Securities and Exchange Commission in the US, and the Monetary Authority of Singapore, are trying to stamp out greenwashing. The SEC has punished BNY Mellon Investment Adviser, for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds it ran. BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty to settle the matter. 

“Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are,” Sacha Sadan, the FCA’s director of Environment Social and Governance, said. “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.”

The regulator said it wants to introduce sustainable investment product labels that will give consumers the confidence to choose the right products for them. There will be three categories – including one for products improving their sustainability over time – underpinned by “objective criteria,” it said. 

“Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which don’t qualify for the sustainable investment labels. It is also proposing a more general anti-greenwashing rule covering all regulated firms. This will help avoid misleading marketing of products,” the FCA said. 

The regulator also proposes several other disclosures to help consumers in the sustainability space.

“These proposed new rules clearly demonstrate that the FCA is putting ESG issues at the heart of its consumer protection strategy,” James Alleyne, legal director in the financial services regulatory team at Kingsley Napley, the law firm, said.

“They will not only assist consumers in making effective ethical investment decisions but will also provide the FCA with the necessary regulatory infrastructure to take decisive supervisory and enforcement action against firms which seek to mislead about sustainability,” Alleyne said.

"Regulated firms will likely have until mid-2023 to get their house in order but would be advised to start implementing these standards as soon as possible if they want to follow best practice in sustainable investing and avoid other potential legal and regulatory consequences,” he added.

Emma Wall, head of investment analysis and research, Hargreaves Lansdown, said: “We welcome the regulator’s efforts to bring some clarity to the growing number and wide variety of responsible investment funds. We know that confusing terminology can stop potential investors from selecting the right funds for them – for their personal wealth goals and ethical priorities. Flows into responsible investment funds have held up well against a challenging market backdrop this year, but with this popularity comes the risk of greenwashing.”

A wider issue is the extent to which rising energy prices, and the shift to so-called renewable energy sources, is viable and politically acceptable. In the UK, for example, the government recently re-approved fracking for oil and natural gas in the UK. Also, North Sea oil and gas development is due to increase. The European Commission, meanwhile, has adjusted its “taxonomy” so that natural gas and nuclear energy are deemed “green.”

(This news service has a programme – Wealth For Good Awards – designed to highlight what wealth managers are doing to ensure that environmental, social and governance considerations are being imbedded into their practices. To find out more about the awards and the 2023 programme, click on this link.)

Here is an editorial commentary from this news service about greenwashing.

There has been pushback against parts of the ESG trend. Vivek Ramaswamy, the author of Woke Inc, who made his fortune investing in pharmaceutical companies, has won the backing of hedge fund manager Bill Ackman and billionaire tech entrepreneur Peter Thiel to launch a new venture called Strive. Ramaswamy said Strive will only invest in firms that focus on maximising profits and will shun those that espouse political beliefs.