After the FCA introduced a new anti-greenwashing rule, Jack McRae speaks to members of the asset servicing industry to assess its potential impact and the future steps required for sustainability
The UK’s Financial Conduct Authority (FCA) has made it clear that stamping out ‘greenwashing’ is central to creating a more sustainable future for the nation. The UK government has set a goal of reaching net-zero by 2050, yet the FCA believes that, without greater environmental, social and governance (ESG) compliance, efforts to reach that target will be hindered.
Sheldon Mills and Sacha Sadan, executive director of Consumers and Competition and director of Environmental, Social and Governance respectively, explained that: “Better industry standards will improve market integrity and consolidate the reputation of the UK as a leading international hub for sustainable finance, helping to attract those looking for genuine, credible sustainability-oriented investment opportunities.”
But what are they doing to get there?
The FCA has introduced new anti-greenwashing rules which aim to ensure financial institutions adhere to ESG rules. The new rules aim to offer clarity to investors by making firms demonstrate more truthfully that they are complying with regulation,demonstrating they are in accordance with the four C’s — Correct, Clear, Complete, and fair Comparisons.
The new rules have been embraced by Martina Macpherson, head of ESG product strategy and management, Financial Information at SIX, who states: “What the regulation covers is expansive, and there is hope this will bring more clarity and consistency when it comes to sustainable investing. But it is important to note this is the first step of many.”
By their own admission, the FCA “have been concerned that some firms may be making misleading or exaggerated sustainability-related claims about their investment products.”
And they are right to feel that way, according to Mattie Yeta, chief sustainability officer at CGI.
“In 2020, the Competition and Markets Authority (CMA) led a sweep of 500 websites together with other global consumer protection agencies and found that 40 per cent of international businesses had made misleading environmental claims,” Yeta explains.
“In 2021 it was reported that the CMA spent an estimated 29,471 working hours (equivalent of three years and four months) on its probes into greenwashing to crack down on wrongdoers between September 2021 and January 2024.”
The state of greenwashing
Exactly how big of an issue is greenwashing in the UK?
Sophie Tuson, environment and climate change practice lead at RPC, offers a rather bleak assessment. She explains: “Greenwashing is a significant issue in the UK, as it is globally.
The increasing consumer and investor demand for sustainable products and services has led some firms to make exaggerated or misleading claims about their environmental and social impact.”
Rampant greenwashing across the industry has created what Tuson describes as a ‘trust deficit’ that has led to, “stakeholders, including asset managers, finding it challenging to differentiate between genuinely sustainable products and those falsely marketed as such.”
Tuson argues that the issue is widespread, and growing.
“We are seeing an uptick in greenwashing cases and investigations against listed companies in both the financial and non-financial markets,” she explains.
“These exemplify the pervasive nature of this problem. The result is not only consumer deception but also a potential misallocation of capital away from genuinely sustainable investments.”
Volker Lainer, head of ESG, Connections and Regulatory Affairs at GoldenSource, goes further to suggest that the development of ESG protocols in the industry has only revealed the extent to which greenwashing is seeped into the roots of the industry.
He says: “The increased accessibility of ESG metrics and methodologies has given the industry a much deeper understanding into how greenwashing manifests itself, and regulators like the FCA are now paying much closer attention.”
Paying attention
RPC’s Tuson praises the new rule as “a robust step” in the efforts to quash greenwashing in the financial services industry. She states: “By requiring all sustainability-related claims to be fair, clear, not misleading, and consistent with the product’s sustainability profile, the rule imposes a high standard of transparency and accountability, in a similar way to the CMA’s Green Claims Code.
“The inclusion of the four C’s helps ensure that firms substantiate their claims comprehensively and present them transparently. This rule, aligned with other regulatory frameworks like the Green Claims Code from the CMA and the ASA guidance, forms a cohesive regulatory approach to tackling greenwashing.”
Tuson is not keen to over-lavish praise upon the FCA just yet, and says that the rule’s effectiveness will rely on “proactive enforcement and the willingness of the FCA to pursue significant cases to set a precedent.”
CGI’s Yeta considers the crackdown on greenwashing as inevitable. She comments: “We are aware that it is likely only a matter of time before we start to see greenwashing litigation claims being brought against corporations in the UK.”
Yeta continues to explain that the risk of reputational damages means companies need to “keep up to date with measures such as the Code and the FCA’s new anti-greenwashing rules which help generate awareness.”
SIX’s Macpherson echoes this sentiment and warns that companies will have to stay aware of changes to regulation. She believes that, “with more specific product labelling rules set to apply from July, UK firms must brace themselves for these ongoing changes to better navigate the complexity jungle.”
Macpherson continues to promote working with ‘trusted vendors’ as the “the only way firms can back up their sustainability credentials, meaning they will be better placed to meet new regulatory requirements and prepare for those to come later this year.”
GoldenSource’s Lainer places emphasis on the importance of data management in remaining on top of ESG compliance.
He comments: “As with all regulations, financial institutions must ensure they have an effective data management strategy in place from now, enabling systems to efficiently collect and aggregate ESG risk-related data to evidence sustainability claims both internally and externally.
“Firms that prioritise [higher scrutiny] will find themselves in a much stronger position as and when the next stages of the UK’s SDR are implemented.”
Lainer labels the FCA’s new rules as “an important step in the right direction”, but believes more work has to be done.
The next steps
RPC’s Tuson believes there are four further problems that still need to be addressed in order to make the financial services industry more sustainable.
Tuson calls on the FCA to “actively monitor the market and investigate potential greenwashing cases, as we’re seeing the CMA and ASA doing, rather than relying on third-party complaints. This proactive stance could deter firms from making misleading claims.”
She continues to argue that there should be “sector-specific guidance” to make understanding the rules easier as well as whistleblower protection.
Tuson explains: “Strengthening protections for whistleblowers and ensuring robust internal reporting mechanisms are crucial.
“This approach can help identify and rectify misleading claims internally before they escalate to regulatory scrutiny.”
Finally, Tuson believes that the FCA should ensure that the consumer is better informed. She believes that “educating consumers about what to look for in sustainability claims can empower them to make informed decisions and spot potential greenwashing.”
CGI’s Yeta is also intent on not getting carried away with the hope that these rules will be immediately revolutionary.
Somewhat muting the earlier optimism, she says: “Whilst the new anti-greenwashing will likely lead to enforcement action in time, it is unrealistic to expect any published outcomes citing a breach of this rule in the immediate future; typically, it takes at least two to three years for enforcement outcomes to follow a new rule.”
Yet, she argues the FCA have more than enough powers currently in place to begin making a concerted effort to crack down on companies greenwashing.
Yera explains: “The FCA’s pre-existing suite of powers, as well as its principles-based approach to enforcement, is certainly broad enough for it to be enforcing against greenwashing now, whether that is on a criminal basis under the Financial Services Act 2012, or on a regulatory basis for breach of its rules or principles.”
Extra ESG
Both RPC’s Tuson and CGI’s Yeta believe greater steps need to be made to ensure all ESG regulation is being complied with. Both share the belief that data collection and standardisation are integral to ensuring firms remain in-line with rules.
Yeta explains: “Data collection is essential for organisations to successfully identify, assess and report on ESG. For instance, information on clients’ greenhouse gas emissions or the locations of their production facilities allows organisations to assess the exposure to physical and transition risks.”
She continues to suggest that “information on clients’ supply chain structure, including exposure to geographies with higher human rights can give an organisation a better overview of its value chain activities.”
The difficulty with this data collection is its resource-intensive nature. Collecting and ensuring this data is accurate requires significant manpower, time and resources and, even then, is still not always accurate. Yeta argues: “The industry needs to find the means to better collaborate and share data for ease of reporting and communication.”
RPC’s Tuson wants the industry to adopt “standardised metrics and reporting frameworks for ESG data” because, in their current form, they are unable to offer fair and accurate comparison and demonstrate the true levels of sustainability between different investments.
Firms also need to offer “transparency and accountability in supply chains, especially regarding human rights and environmental impact,” Tuson adds. “Addressing climate-related risks and ensuring resilience against climate impacts is also vital for long-term sustainability.”
Creating a sustainable future is reliant on firms becoming more ESG-compliant and the FCA enforcing rules that crackdown on greenwashing. Yet, at the root of the problem is a laissez-faire approach to becoming sustainable.
Not only does the impetus fall on the regulators to prevent greenwashing, Tuson rallies firms who “must go beyond surface-level commitments and integrate ESG factors into their core business strategies and operations [by] setting and meeting ambitious sustainability targets and ensuring that these are reflected across the entire value chain.”
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