Last week the Financial Conduct Authority (FCA) in the UK issued new guidance (FG24/3) on its anti-greenwashing rule which comes into effect on 31 May 2024.
The rule requires all FCA-authorised firms to be able to substantiate any sustainability-related claims when communicating with clients about products and services, and to ensure these claims are “fair, clear and not misleading”.
The anti-greenwashing rule is part of the new Sustainability Disclosure Requirements (SDR) and investment labels regime, finalised in November 2023.
Greenwashing is the process by which a fund manager or other investment product provider can make mis-leading claims to investors about just how climate friendly their strategy is. It has crept to the top of the regulatory agenda in the UK and Europe because asset managers can see how it can help them to sell their funds to investors.
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There has been a proliferation of disclosure regulations in recent years which has led to more transparency. However, many of these disclosures are complex and technical, not very accessible and, if they are read, have done little to build trust in the sector.
ESG teams, comms teams, PR teams, and IR teams often don’t align on ESG communications. Additionally, in a world of miscommunication and social media, firms cannot control the narrative and transparency commitments can backfire. That’s why regulations that focus on fair, clear and not misleading communications are considered vital.
Making sustainability clearer for investors
“As the rule becomes more established over time, it will have the positive effect of increasing stakeholder confidence in sustainability claims and hopefully encourage more corporates to adopt robust sustainability frameworks as part of their standard reporting procedures,” said Rob Guest, the co-lead fund manager of the Foresight Sustainable Forestry Company.
The introduction of a robust framework establishing parameters for a reliable sustainability reporting regime is being hailed as a positive development for the investment trust industry overall – as well as for investors who will be able to assess different sustainable investment vehicles using meaningful ‘like for like’ criteria.
“The ability of investors to make informed decisions is vital for confidence in the sector to continue expanding, so the anti-greenwashing rule will provide an important safeguard against companies claiming sustainability credentials without providing clear and demonstrable evidence,” said Ed Mountney, the co-lead investment manager at JLEN Environmental Assets Group.
SFDR and the labelling of investment trusts
The SDR labelling regime provides firms with more options for how funds can be classified than other labelling schemes, like SFDR. This can be seen both positively and negatively.
On one hand, the ability to choose from four labels ensures an investment trust can select a label that most closely aligns with the sustainability characteristics of the fund. It can also be used as a way to highlight specific sustainability attributes of that fund. On the other hand, too many options could make it difficult for investors to compare the sustainability characteristics of funds with different labels.
There is cost and time involved in this process as both internal and external resource is usually required (such as legal support) to adopt new labelling, produce the necessary communication materials to keep stakeholders informed and ensure that audiences are educated enough to understand the new labelling in the first place.
“We expect that the anti-greenwashing rule and labelling regime will be of particular benefit to investment vehicles dedicated specifically to sustainable investment, such as Foresight Sustainable Forestry Company, demonstrating our robust sustainability credentials to their full advantage and helping our investment thesis to become more commonly understood,” said Guest.
For investors it does mean that it should be able to more clearly assess the actual ‘green’ characteristics of an investment trust. With more investors than ever before becoming concerned about the way their money is put to work, accurate labelling is becoming an important part of the process.
