UK FCA Tackles Risks of Abusive Sale of Greenwashing Funds

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The Financial Conduct Authority (FCA) recently published a summary of its findings on the analysis of the effects of presenting funds as “sustainable” on consumers’ investment decisions and the associated mis-selling risks. Its findings will be useful for companies that challenge themselves to assess where systemic regulatory issues may exist within their operations.

As concerns about climate change continue to gain in importance to the public, the proportion of consumers seeking to invest in ‘green’ financial products that address sustainability and broader environmental, social and governance (ESG) issues also increased. However, with an ever-growing range of such products and services entering the market, the risk of “greenwashing” – the promotion of products that make misleading or erroneous claims about their positive environmental impact – is real.

Greenwashing itself is not a particularly new phenomenon, but there has been a marked increase in political and regulatory control in recent years as more and more consumers invest in green products. The government’s main concern is that climate-related poor disclosure could undermine confidence in these markets and sectors, leading to fewer people investing and progress in genuinely green sectors being hampered. The FCA is of course concerned about the risk to client bottom lines and the stability and proper functioning of the industry in this regard.

These concerns were amplified in a recent report from the House of Commons Treasury Committee, which said: “The HM Treasury must ensure that the FCA has the appropriate attributions, powers and priorities to prevent product greenwashing. available to consumers ”.

Mis-selling of green products is likely to give rise to increasing regulatory oversight and consumer complaints, whether through litigation or through the Financial Ombudsman Service (FOS). FCA’s current regulatory framework – and proposed changes specifically targeting ESG products – will play a fundamental role in this regard.

A change in regulatory approach

Against this background, and to improve its regulatory regime, the FCA has taken a more proactive stance on climate-related disclosures in recent years. For example, recent proposed rule changes for asset managers, life insurers, and FCA-regulated pension providers, if passed, will require the disclosure of high-quality information on how Climate-related risks and opportunities are managed throughout the investment chain, including to consumers. The rules would be relevant for business regulatory and client action exposures. FCA believes that better information will help clients and consumers make more informed decisions about their investments.

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