The FCA wants to clean up greenwashing

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What is greenwashing?

ESG has become an increasingly important investment theme over recent years, as we become more aware of climate change, the environment and social inequalities.

The C-suites of many large companies have taken note of this, and have for the most part implemented policies designed to reduce their carbon footprints and improve the sustainability of their businesses.

The uptake of ESG has also created an attractive opportunity for the fund and wealth management industries, whose customers want to do, and be seen to do, the right thing with their investments.

However whilst some managers created new products specifically aimed at meeting ESG goals, others have simply re-branded existing funds, or made token gestures in the direction of those goals. Through a process known as “greenwashing “.

Greenwashing can take many forms, for example, the attempt by certain automakers to circumvent emissions regulations in the US and Europe, or the miss-labelling of a fund or other collective investment scheme, which contains just one or two environmentally friendly, or sustainable investments.

The issue is widespread according to consultancy firm Deloitte, as many as 71.0% of almost 600 ESG funds failed to meet tests designed to show that they were in alignment with the Paris agreement on global emissions.

Deloitte also found that there was often little differentiation between the holdings in ESG and non-ESG funds, for example, nine of the 10 largest holdings in the $20.0 billion ESG optimised iShares MSCI USA ETF, are the same as the largest-weighted companies that make up the S&P 500.

At best greenwashing is a misrepresentation, but at its worst, it can be an outright attempt to deceive consumers and other end users.

What has the FCA proposed?

This is a practice that the FCA is determined to crack down on, and this week the regulator published a series of proposed rules to implement that.

The suggested measures include guidelines around product labelling and the appropriate use of ESG-related terminology, and disclosures.

Following the publication of the FCA proposals, a consultation period will remain open until January 25th 2023, during which time stakeholders will have a chance to air their views.

What do practitioners think?

Hargreaves Lansdown, the UK’s largest direct-to-consumer investing and share trading platform, was among the first to comment on the FCA’s suggestions.

Emma Wall, Head of Investment Analysis and Research at 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”

And that

“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. Greater clarity within the sector, alongside a crackdown on greenwashing, will help drive better outcomes for investors as well as the planet and society.”

Hargreaves Lansdown has some 1.75 million clients and has assets under administration of £122.7 billion. The firm’s website has a section dedicated to ESG investing and it offers a range of ESG-focused funds from managers such as Aegon, Legal and General and Bank of New York Mellon.

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