FCA publishes consultation proposing measures to clamp down on greenwashing

The Financial Conduct Authority (FCA) published a consultation paper on 25 October 2022 proposing a package of measures intended to clamp down on greenwashing, including how terms like "ESG", "green" or "sustainable" can be used¹. The Financial Services Compensation Scheme (FSCS) set out the consultation in an article by its Chief Counsel, James Darbyshire, and Senior Lawyer, Emma Brown, published on 31 October 2022¹.

The FSCS article describes the wider context in which the proposals sit. It says there is no global standardised approach to how ESG factors are measured, and that a lack of common definitions for "green" or "ESG" investments, differing regional approaches to regulation and an absence of widely adopted minimum standards create the potential for confusion and, at worst, significant consumer harm¹. ESG is shorthand for Environmental, Social and Governance¹. The FSCS says it is already seeing growing evidence of greenwashing in retail investment products¹.

The article cites Global Forestry International (GFI) as an example of the harm it has observed. GFI marketed a green retirement pension scheme, which had underlying investments in the Brazilian teak forestry fund, and attracted approximately £37m of investment before going into liquidation¹. The FSCS states the investment was in fact a fraud, and that the Serious Fraud Office brought a successful criminal prosecution against the two directors of GFI earlier in 2022¹. Because many of these investments were made on the advice of now-failed independent financial advisers or SIPP operators, the FSCS says it has been able to protect the majority of these investors¹.

The FSCS also reports that it has seen increasing levels of pension mis-selling claims over the last few years, where its protection has been triggered by the failure of regulated independent financial advisers and SIPP operators¹. Its research suggests that, for pensions and investment products, consumers who are aware of FSCS protection are at least 15 percentage points more likely to be confident in choosing and managing these products¹.

The FSCS article notes that the FCA's ESG Strategy and Business Plan set out its commitment to build trust and integrity in ESG-labelled products and the supporting ecosystem¹. The consultation paper itself is not reproduced in the material, and the specific rules proposed, their scope and their intended commencement date have not been reported here.

Why it matters for households

The proposals concern the language used to market investments, so they bear on what savers and pension investors are told about a product's environmental or social credentials. The FSCS describes greenwashing as investors being misled about the green credentials of a product they are considering¹. Its account of GFI shows how pension money placed in an investment marketed as ethical and environmentally beneficial can be lost: around £37m was invested before the scheme went into liquidation, and the FSCS says the investment was a fraud¹. Where such investments were made on the advice of failed advisers or SIPP operators, FSCS protection was triggered for the majority of those investors¹. The FSCS also points to its own research finding that awareness of FSCS protection is associated with greater confidence in choosing and managing pensions and investment products¹. The consultation was published on 25 October 2022; the article does not state when any final rules would take effect.

What happens next

Governments are due to meet at Sharm El Sheikh, Egypt for the COP27 climate conference in November 2022, which the FSCS says will look to pave the way for future ambition on climate change¹. The FSCS expects continued expectations that corporations, including the finance industry, will play a decisive role in meeting the UN's Sustainable Development Goals, and says a key foundation for success will be greater clarity for investors on firms' ESG claims¹. No date for the outcome of the FCA consultation is given in the material.

More on what greenwashing in investments means and on FCA sustainability labels for investments is covered in our guides.