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

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

The Financial Conduct Authority on Tuesday revealed a package of measures designed to rebuild trust in environmental, social and governance (ESG)-driven investments, amid concerns of widespread mis-selling and cynical attempts to dupe consumers.

Greenwashing has become an urgent concern for the regulator, which is keen to prevent investment companies from using misleading literature to dress up investment funds as eco-friendly or green when they are not.

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

The FCA’s ESG director Sacha Sadan said: ‘We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs – this is a crucial step for consumer protection as sustainable investment grows in popularity.

‘By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment.’

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

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

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

In March, the FCA warned benchmark administrators providing ESG products they may be punished if they did not improve their ‘poor’ disclosures to investors. 

Investment fund groups rely on this data to construct green investment portfolios, but the FCA said there is ‘potential for widespread failings’ by benchmark compilers.

Having exploded in popularity in the year prior to the pandemic, interest in ESG investing has slowed in 2023, with British investors pulling around £1billion from the funds since the start of the year to the end of September.

Greenwashing, where firms inflate or mislead consumers about their environmental credentials, has dented investors’ trust in ESG – a market that is expected to be worth £27.5trillion by 2026.

The proportion of investors who are concerned about greenwashing has jumped from 48 per cent in 2021 to 63 per cent in 2023, according to a recent survey from the Association of Investment Companies.

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

But analysts have suggested record outflows could be rooted in the ongoing pressures on household budgets – ultimately putting them off investments.

Much of the ESG universe of funds have also struggled for performance recently owing to their exclusion of sectors like defence and energy, which have seen bumper gains over two-years characterised 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 and trust among retail investors’.

He added: ‘We believe that the new investment labels can address concerns often raised by savers over their funds’ sustainability claims and profile.’

This post first appeared on Dailymail.co.uk