City watchdog reveals ‘greenwashing’ clampdown in fightback against bogus eco investing claims

  • FCA says fund documents must be ‘fair, clear and not misleading’ about eco claims
  • City businesses will face new disclosure requirements and marketing rules
  • It follows concerns about widespread mis-selling and attempts to mislead consumers

The City Watchdog will force investment firms to ensure the sustainability claims of their products are ‘fair, clear and not misleading’, as part of a crackdown on so-called ‘greenwashing’.

The Financial Conduct Authority on Tuesday unveiled a package of measures aimed at restoring confidence in environmental, social and governance (ESG)-driven investments, amid concerns about widespread mis-selling and cynical attempts to mislead consumers.

Greenwashing has become a pressing concern for the regulator, which is keen to prevent investment firms from using misleading literature to portray investment funds as environmentally friendly or green when they are not.

New regime: The FCA wants to improve confidence in the sustainable investment marker

The FCA’s ESG director Sacha Sadan said: ‘We are introducing a simple, easy-to-understand regime so that investors can assess whether funds meet their investment needs. This is a crucial step for consumer protection as sustainable investing becomes increasingly popular.

‘By increasing confidence in the sustainable investment market, Britain will be able to maintain its position at the forefront of sustainable finance and reap the benefits of being a leading international investment centre.’

City companies will now face new disclosure requirements, as well as restrictions on how they can market and name products.

Investors will be provided with a regulated labeling system, with fund houses required to demonstrate ‘clear sustainability goals and criteria’.

The FCA said the move will ‘protect consumers by helping them make more informed decisions when investing and boost the credibility of the sustainable investment market’.

In March, the FCA warned benchmark managers offering ESG products that they could be punished if they do not improve their ‘poor’ disclosure to investors.

Investment fund groups rely on this data to build green investment portfolios, but the FCA said there is ‘potential for widespread shortcomings’ in building benchmarks.

After exploding in popularity in the year leading up to the pandemic, interest in ESG investing has waned in 2023, with UK investors withdrawing around £1 billion from the funds since the start of the year to the end of September.

Greenwashing, where companies inflate or mislead consumers about their environmental performance, has eroded investor confidence in ESG – a market expected to be worth £27.5 trillion by 2026.

The share of investors concerned about greenwashing has risen from 48 percent in 2021 to 63 percent in 2023, according to a recent survey by the Association of Investment Companies.

The FCA’s crackdown follows similar moves in the EU, while the scale of greenwashing concerns even led to German police raising Deutsche Bank subsidiary DWS in 2021.

But analysts have suggested that the record outflows could be rooted in continued pressure on household budgets, ultimately driving them away from investment.

Much of the ESG universe of funds has also struggled to perform recently due to the exclusion of sectors like defense and energy, which have posted huge gains over the past two years marked by geopolitical volatility.

Chief executive of the UK Sustainable Investment and Finance Association, James Alexander, said the FCA’s latest efforts to combat greenwashing “mark an important moment in our industry’s efforts to build greater confidence among retail investors.”

He added: ‘We believe the new investment labels can address the concerns that savers have often expressed about the sustainability claims and profile of their funds.’