The FCA’s New Plan to Address Greenwashing

The FCA has announced its intention to introduce rules to reduce greenwashing and implement restrictions on the usage of terms such as ‘ESG’, ‘green’ and ‘sustainable’. This will include using a set of three fund labels to distinguish types of “green” investing and imposing a higher burden on firms to back up marketing with evidence.

What is greenwashing?

Greenwashing is when a company appears to be environmentally conscious for marketing purposes but isn't making any notable sustainability efforts. 81% of consumers are more likely to buy from a brand with an effective approach to sustainability, so there is a lot of pressure on brands to appear to be making a positive impact. There have been several high-profile examples of greenwashing.

Recently, HSBC’s climate change posters have been banned by the Advertising Standards Authority (ASA) which said that the posters "omitted significant information about HSBC's contribution to carbon dioxide and greenhouse gas emissions."

The chief executive of top German asset manager DWS resigned over allegations that the company misled investors about "green" investments.

In the US, the Securities and Exchange Commission is working on a rule that will require funds with names using words such as “green” or “sustainable”, to disclose how their investments satisfy those descriptions.

The FCA’s proposal

Sacha Sadan, the FCA’s Director of Environment, Social and Governance, said:

'Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be more sustainable than they are. Our proposed rules will help consumers and firms build trust in this sector…We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.'

The FCA is proposing to introduce:

• Restrictions on how certain sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – can be used in product names and marketing for products which don’t qualify for the sustainable investment labels. 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.
• Requirements for distributors of products to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.

Dr. Kim Schumacher, Lecturer in Sustainable Finance and ESG at Tokyo Institute of Technology, said "Greenwashing leads us to think that something is happening while nothing is happening. This then prevents necessary investments and innovation because we think we already achieved something that in fact only exists on paper.”

Marketing and communications with customers should be transparent and not make claims of sustainable efforts that are not being met or that are being undermined by other activities within the firm.

The insurance industry is in a unique position to motivate businesses to adopt transparent, sustainable practices and support them in their green transition.

Firms should look to promote a culture that emphasizes climate change and other ESG issues as well as review their own existing operations for opportunities to reduce carbon emissions. Targets should be set to work towards sustainability goals and measures, and implementation plans should be outlined to ensure those targets are achieved.

Scenario analysis and stress testing can allow firms to assess the impact of potential future climate outcomes. Firms can also use a business model analysis to determine the impacts of climate risks on the firm’s risk profile, business strategy and sustainability, as well as to inform strategic planning.

A recent report from Marsh has highlighted that Environmental, Social and Governance (ESG) factors will play a significant role in the future of underwriting - you can read more about this in our recent article.