UK fund managers are bracing for ‘anti-greenwashing’ rules

The writer is European head of financial services sector at Eversheds Sutherland

Fund managers are anxiously awaiting final rules from UK regulators on the disclosure of the environmental impact of their investments and how they can market products with a “sustainable” branding.

While the sustainability disclosure regime will affect all financial firms regulated by the UK’s Financial Conduct Authority, the largest initial impact will be for asset managers selling products to consumers. 

The FCA is expected to ramp up requirements for sustainable consumer investment products. Fund managers will be required to choose an FCA prescribed label if they want to market a product as “sustainable”.

The regime is intended to address the FCA’s concern that trust in the market is being eroded by firms making “exaggerated claims” about their products’ sustainability features. Fund houses have suspended plans pending publication of the rules, originally scheduled for the end of June but now expected to land before Christmas.

Central to the regime is an “anti-greenwashing rule”. All FCA regulated firms will be required to ensure their claims about sustainability products are “clear, fair and not misleading” and are commensurate with the features of their products. The FCA is expected to police this robustly.

A novel element of the regime, which exceeds similar rules in the EU and US, is the FCA’s proposal for retail sustainable funds to adopt a fund label describing the fund’s sustainability approach. The FCA consulted on three proposed labels, but there is speculation that the final rules may include an additional label to accommodate funds with a mixed portfolio/strategy. Funds without a label won’t be able to market themselves as “sustainable” and will be prevented from using terms such as “sustainability”, “impact”, etc in their names. 

Interestingly, our research suggests that the majority of regulated funds with a sustainability theme currently sold in the UK are established outside the UK (usually in Ireland and Luxembourg). Initially, these “overseas funds” won’t be in scope of the labelling and naming regime, even if being sold to UK consumers. 

This questions the effectiveness of the FCA’s plans unless and until these overseas funds are brought into their scope. It also arguably puts overseas funds at considerable advantage to UK funds, which will have to comply with detailed disclosure requirements about their approach to sustainability. Collection of the data required to do this remains an imperfect science; many firms will struggle to set sensible key performance indicators, source data and disclose against the metrics.

Those products that can’t meet the label requirements may need to change their names and moderate any sustainability claims in their documentation. We expect that the FCA will be extremely busy processing requests for changes to regulated funds to comply with the new requirements; it is already gearing up for the challenge with additional personnel. Firms may have as little as a year to make the changes. Given the scale of the changes and, in some cases, the need to notify investors in advance, timing will be tight.

We also expect the FCA to report back on its thematic review of firms’ compliance with existing disclosure rules on environmental, social and corporate governance issues shortly. It’s likely that the FCA will take issue with how the industry has approached sustainability claims thus far. Such a focus may mean that firms decide to retreat from making prominent sustainability claims. This is probably where the FCA is intentionally driving the market — only those funds which have true sustainability features, substantiated and measured, should be rightly sold as such.

The FCA is certainly setting a higher bar than other regulators on sustainability. It will be interesting to see how the EU reacts. The EU’s Sustainable Finance Disclosure Regulation met with almost universal criticism from the industry, recently undergoing substantial revision. The Securities and Exchange Commission’s regime is much less robust and is some time off being implemented.

Therefore, despite the seemingly short-term pain brought by the FCA’s new regime, there are likely to be long-term gains for the UK in the form of vibrant market in ESG funds that can deliver investors’ financial and non-financial ambitions. Additional transparency should allow comparisons between firms which may support a competitive market. Additionally, the UK itself may become more competitive by setting a high standard.