The UK Competition and Markets Authority (CMA) found that 40% of green claims made online could be misleading and as a consequence we can expect to see more regulatory scrutiny of green marketing cross-sector and most notably in finance.

Thanks to the publication of the Green Claims Code, over the past year we have witnessed a crackdown by regulators on how businesses and funds promote their ESG credentials. In October 2022, the Advertising Standards Authority (ASA) found that a financial institution had misled customers by making unqualified claims and omitting material information about its environmental credentials. Earlier in the summer of 2022, the Competition and Markets Authority (CMA) launched its first so called Greenwashing investigations under the Green Claims Code into the eco-friendly and sustainability claims made by various fast fashion retailers about their fashion products, including clothing, footwear and accessories.

Greenwashing crackdowns are also on the increase in the US, with the SEC fining an American bank $4 million over the investment bank’s failure to follow Environmental, Social and Governance (ESG) policies and procedure. Earlier in 2022, they fined another American financial institution after the regulator found the bank’s investment adviser division misstated how it applied ESG criteria when making investment decisions for some of its mutual funds.

In a bid to increase the robustness of claims, the Financial Conduct Authority (FCA) is proposing a package of new measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. Due to the significant 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.

What it means for businesses

The FCA is proposing to introduce:

• Sustainable investment product labels that will 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.
• Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing.
• It is also proposing a more general anti-greenwashing rule covering all regulated firms. This will help avoid misleading marketing of products.
• 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.

Key dates:
A consultation on the proposed rules closed on 25 January 2023.
The FCA plans to publish final rules by the first half of 2023.

On the horizon

The European Securities and Markets Authority (ESMA) has launched a consultation on the use of ESG and sustainability-related terms in fund names, in a bid to tackle greenwashing and protect investors. To avoid misleading investors, ESMA believes that ESG and sustainability-related terms in funds’ names should be supported materially by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policies.

A final version of the proposed rules is expected by Q3 2023.

A six-month transition period is also proposed for funds launched prior to the proposed rules coming into effect if those funds use ESG or sustainability-related terms in their names. These funds will then have to bring their investments in line with the quantitative thresholds or change their names to remove ESG/sustainability-related terms.

For more on ESG and sustainability trends, download our Insight here.