How do we prevent greenwashing of investment products? Last week ShareAction submitted its response to the FCA’s consultation on Sustainable Disclosure Requirements and investment labels.
The regulator has proposed new Sustainable Focus, Sustainable Improvers and Sustainable Impact labels to reflect the broad range of approaches to sustainable investment. Each label will require funds to publish a brand new sustainability objective against which progress across environmental, social and governance (ESG) themes can be gauged.
The focus of the FCA’s consultation was to ensure investors can trust sustainable investment products, by introducing new labels to distinguish those which are genuinely “doing good” from those which are not.
Clear labelling of sustainable investment products could prevent greenwashing
One big issue over the past few years has been the rise of greenwashing (or sustainability-washing!), whereby firms over-egg their sustainability credentials to sell investment products.
Greenwashing was thrust into the spotlight last year when Deutsche Bank’s asset management arm was raided by German authorities for allegedly misleading investors about “green” investments. Cases like this only serve to erode public trust in the global sustainable finance market – of which the UK is a leader – undermining the potential for people’s savings to have real-world positive impacts.
We’re encouraged by the FCA’s proposals for a new labelling regime but have made three recommendations to ensure the new system is fit for purpose and tackles greenwashing.
The criteria for the labels should be robust – we suggest 85% of funds invested sustainably for the Sustainable Focus label
Firstly, we had concerns about the criteria funds would need to meet to qualify for a sustainable investment label. While the labels are not intended to be hierarchical, the Sustainable Focus label is intended for funds which are well-aligned with a sustainability related theme and avoid non-sustainable investments.
We were surprised to find that to qualify for the label, only 70% of a fund’s assets needed to be invested sustainably, meaning up to 30% of the fund could be invested in… well, anything.
We think consumers may also be surprised to find up to 30% of their savings could be invested in non-sustainable assets risking claims of greenwashing and serving to undermine the new regime. To mitigate these risks, ShareAction recommends the FCA increase the threshold for sustainable assets to at least 85%.
Provide clear guidance on the expectations from investor stewardship
The Sustainable Improvers label is geared towards funds that aim to improve their sustainability credentials, including through investor stewardship (such as voting and corporate engagement). In fact, all three sustainability labels consider investor stewardship to be a critical activity in pursuing the fund’s sustainability objective. Despite the importance of stewardship in achieving positive behavioural change, ShareAction research has found that engagement strategies are often poorly articulated and reporting is vague. Our findings also show that asset managers are often not harnessing the full potential of voting and often vote against ESG-related proposals.
We recommend that the FCA publishes clear guidance on its stewardship expectations for funds using the labels, and we have offered to support the regulator in doing so.
Encourage collaboration on global challenges instead of imposing sanctions
Our final recommendation aims to make it easier for investors to work together to tackle sustainability challenges. Currently, market abuse rules mean that many investors are put off from collaborating on issues like climate change due to fears around potential legal sanctions. This is despite the Stewardship Code saying signatories should “where necessary, participate in collaborative engagement to influence issuers.”
Market abuse rules may be a significant block on firms meeting a fund’s sustainability objective. The Competition and Markets Authority (CMA) has recently announced it will clarify its approach – including where it won’t take enforcement action – where businesses collaborate on climate change. This is good news, but the CMA should further clarify that broader global challenges, such as biodiversity and health, will also be included in its review. The FCA should embed these developments in the new labelling regime.
We will continue to support the FCA to implement the roll out of the labelling regime ahead of the publication of new rules this summer.