The FCA is planning to clamp down on so-called ‘greenwashing’ - false claims that funds and financial products abide by strict ESG credentials.

The regulator is proposing a package of measures in CP22/20 including investment product sustainability labels and restrictions on the use of terms such as ‘ESG’, ‘green’ or ‘sustainable.’ 

The watchdog will also look at the role of financial advice in ESG recommendations.

Last week, the Advertising Standards Authority banned a series of adverts by HSBC which claimed the bank was investing environmentally when it was also invested in companies responsible for substantial emissions.

In CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels, the FCA is proposing potential new rules it says will protect consumers and “improve trust” in sustainable investment products. 

The work is part of the FCA's ESG Strategy and Business Plan to build trust and integrity in ESG-labelled 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 wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.”

Among the FCA proposals are:

• Sustainable investment product labels that 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 
• Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which do not qualify for the sustainable investment labels. The FCA is also proposing a more general anti-greenwashing rule covering all regulated firms 
• Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product – this includes disclosing investments that a consumer may not expect to be held in the product
• More detailed disclosures, suitable for institutional investors or retail investors that want to know more
• Requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers

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

"Our proposed rules will help consumers and firms build trust in this sector. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy." 

The FCA is also stepping up its supervisory 'engagement' on sustainable finance and enhancing its enforcement strategy. This includes checking how firms have responded to the expectations set out in the 'Dear Chair' letter issued to authorised fund managers in July 2021.

Beth Lloyd, head of responsible wealth management strategy at Quilter, said: "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.

"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. Having clear definitions to adhere to and refer back to will not only help facilitate better understanding, but also result in better outcomes as expectations and reality are more likely to be aligned."

“This is not final part of the journey though. The FCA has said it will consult on the role financial advice has to play in this. This is a fundamentally important next step as it is vital we see consistency across the value chain."

• Details of the proposals are here:  CP22/20 (PDF) The consultation is open until 25 January. Final rules are due by mid 2023.