Featured in ESG Insight, A-Team Insight:
The UK will implement its own anti-greenwashing rule at the end of this month but some industry participants are concerned that its data requirements are vague and could be misinterpreted by institutions.
The Financial Conduct Authority’s (FCA) rule, part of its broader Sustainability Disclosure Requirement (SDR), expects companies to ensure that any sustainability claims made about their products “are fair, clear and not misleading”. The rules were completed in November and will also include frameworks on financial product labelling, which will come into force in July, and marketing.
The SDR has been drawn up to protect investors, especially in the retail sector, from sharp practices by organisations making sustainability claims that cannot be substantiated. But critics say there are grey areas and ambiguities in the guidelines that could leave market participants at risk of inadvertently breaching the code. In particular, NeoXam head of product and pre-sales for the Americas Yann Bloch drew attention to the volume of data that firms would have to gather.
“With portfolio managers now having to disclose any cash or derivatives they are using for liquidity or risk management purposes that do not directly contribute to their sustainability objectives, it will become even more important that they are able to provide regulators a breakdown of their whole portfolio makeups, and how each asset fits into how they market their funds,” Bloch said.
“This relies on being able to efficiently pull both financial and extra-financial information together into a regulatory report, which we know a lot of outdated legacy systems struggle with.”
Fair Markets
Jurisdictions around the world are putting SDRs in place to maintain the integrity of sustainability markets. Recent criticism of ESG investment processes have been fuelled in part by high-profile allegations of greenwashing by financial companies. Among them, Deutsche Bank’s DWS asset management business was accused by its parent group in 2022 of misleading investors in its ESG Climate Tech Fund.
The FCA said the need for its rules, which come into force on May 31, would be all the more important as the UK’s sustainable markets grow. The regulator cited its latest Financial Lives survey, which found that 81 per cent of adults questioned said they “would like their investments to do some good as well as provide a financial return”. The FCA estimates that there is more than US$18 trillion invested in sustainability-linked assets and financial instruments.
FCA director of ESG Sacha Sadan said implementation of the rules would be a milestone for green-market investors.
“Consumers care about investing in products that have a positive impact on the planet and people,” Sadan said. “That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money.”
Grey Areas
Nevertheless, some lawyers have said the wording of the rule is ambiguous and could lead to confusion. Its use of the term “financial products and services” was questioned by one legal expert in a report in IFLR magazine, who asked whether it applied only to regulated products and not unregulated products.
Another took a similar view to NeoXam’s Bloch, arguing that the definition of sustainability was vague and open to interpretation, meaning that compliant organisations would need specific expertise to evaluate data and assess changing market norms.
“This places a significant compliance burden on firms,” one lawyer was quoted as saying.
