In August 2022 our CEO Lewis Hamm asked Does socially responsible investing exist?
Lewis discussed the numerous challenges faced by ESG investing and expressed optimism for a transition to ‘ethical capitalism’, while acknowledging the risk of greenwashing posing a challenge for clients and regulators alike.
With the increasing prominence of ESG and green labels as marketing tools to attract new funds, it became evident that action was necessary to ensure that investments truly made a positive impact on society and the planet, rather than merely serving as a token gesture.
Although difficult to quantify the extent to which greenwashing is now embedded in ESG investing, a Schroders study of 750 industry professionals alarmingly found 59% identified greenwashing as a concern when selecting sustainable investments.
With ESG focused assets set to hit $50trn by 2025, accounting for one-third of traded assets, it’s imperative that regulators establish a well-defined and regulated code of conduct governing both ESG investments and their promotion.
Since then, there have been efforts by both the Treasury and the FCA to clamp down on greenwashing. The Treasury has aimed to tackle unregulated ESG ratings agencies that grant accreditation to asset managers for managing ‘green’ or ‘ESG’ funds without providing sufficient proof to investors. The Treasury's investigation resulted in a letter to the FCA, with the primary recommendation being to bring ESG ratings agencies under the FCA’s regulatory review, therefore subjecting them to regulation.
This is surely a basic prerequisite for investors to have faith that the asset managers they entrust with their capital are fulfilling the promise made in their investment brochures.
The FCA has taken additional steps by releasing the Sustainability Disclosure Requirements (SDR) and investments labels consultation paper. The paper outlines five new regulations that asset managers must follow regarding ESG, thus providing a framework for their adherence:
- Introduction of sustainable investment product labels – these labels will provide consumers with the confidence they need to select appropriate products and with three categories to choose from, including one that highlights products that enhance their sustainability over time, based on objective criteria.
- Restrictions on the use of terms such as ‘ESG’, ‘green’ or ‘sustainable’ in product names and marketing for products that don’t meet the criteria for the sustainable investment labels. The paper also recommends a broader anti-greenwashing rule that applies to all regulated firms, aiming to prevent misleading marketing.
- Consumer-facing disclosures that provide clarity on the significant sustainability-related characteristics of an investment product. This includes the disclosure of investments that may not be expected to be held within a product, aiding consumer understanding.
- Additional disclosures, suitable for institutional investors or retail investors who wish to further their understanding.
- Requirements for distributors of products, such as investment platforms, to ensure both labels and consumer-facing disclosures are accessible and clear to consumers.
The rules were expected to be enforced on 30 June 2023, however the FCA announced a delay on 29 March where Q3 now seems more likely.
So, what can we expect the outcomes of the FCA clampdown to be?
Well hopefully transparency. The ESG market has become clouded in discussions around greenwashing with the focus being on the use of ESG labelling to sell products and not the positive impact that ESG investments should, and are in many cases, having on the world around us.
ESG labelling will give investors, intermediaries, and institutions confidence that the managers they're trusting with their capital are acting in accordance with their promises.
However, some are concerned that the focus on greenwashing will lead to more ‘greenhushing’, a phrase coined to describe corporations squashing the positive impact of their investments in order to avoid scrutiny, or perhaps the necessity to report, their ESG credentials. This isn’t a good, or intended, outcome of the SDRs.
So we're seeing positive action from the regulator to tackle the widespread misuse of ESG labels, but the FCA must be careful. Empathy of the impact on asset managers that further reporting on ESG will have, coupled with Consumer Duty which is already a major concern, is vital in ensuring the intended outcome of removing greenwashing is achieved, but the celebration of positive societal impacts on investments must not be lost.
