FCA responds to Treasury concerns over its sustainability disclosure requirements

The FCA has responded to concerns raised by the Treasury Sub-Committee following the FCA’s plans to tighten regulations around sustainability labelling which would determine the criteria an investment fund needs to meet before it can describe itself as ‘sustainable’, ‘ESG’, ‘green’ and other similar labels.  (Read our earlier client note for more details of the FCA’s consultation paper that was published in October 2022.) The FCA’s final rules are expected to be published at the end of June 2023 and are due to come into force in June 2024.

The Treasury Sub-Committee has an interest in the FCA’s proposals in this area, particularly on the question of whether reforms “could drive funds away from ESG investing” and intends to conduct “further work in this space soon”.

Points of interest from the letter dated 9 January 2023, are summarised below.

Weighing up the benefits against the risk of reducing consumer choice

The FCA highlight the difficulty consumers have in navigating the complex and diverse market for sustainable investment products, and highlight that the FCA’s proposals should not reduce choice, but rather help investors differentiate products that aim to deliver a positive, sustainable outcome from those that do not – thereby helping to rebuild trust and protect consumers in the market.

Uncertainties in the cost benefit analysis

A key question asked by the Sub-Committee was how the FCA calculated that two-thirds of UK funds that currently use sustainability related terms in their names and marketing would likely need to change their marketing as a result of the proposed new rules. The FCA acknowledged in its consultation  that “uncertainties and assumptions” were present in the cost benefit analysis (CBA) associated with its proposals. The FCA said it did not yet know what proportion of funds will be adapted to meet the qualifying criteria, and what proportion will choose instead to change their marketing, so for the purposes of the cost benefit analysis assumptions were necessary (and in any event views have been invited as to the reasonableness of the assumptions).

The FCA also gives a reminder that, given that most of the requirements will not come into force until 30 June 2024, firms will have sufficient time to consider their products against the FCA’s criteria in order to make any necessary changes to qualify for a label, or choose not to label their products and amend their naming and marketing.

Enforcement of new rules

In response to how the FCA intends to monitor and enforce its rules, the FCA states that it will it proactively assess how the rules are adopted in several ways, such as challenging firms on their use of labels and their disclosures, and carrying out a review of the characteristics of labelled products to assess whether they are meeting the criteria. It will also conduct a post-implementation review after three years of the regime coming into force.

Sustainable investment in the UK

The FCA was also asked whether it expects the overall level of sustainable investing by these two-thirds of firms to decline following the introduction of the rules. The FCA notes that whilst a firm may need to make changes to its products to meet the qualifying criteria for a label, this is consistent with existing fund rules and therefore the FCA does not expect a decline in sustainable investment. The FCA also does not expect its proposals to entail material additional costs.

‘Anti-greenwashing’ rule

The Sub-Committee asked what the FCA can do with its proposed ‘anti-greenwashing’ rule that it could not previously do with its existing financial promotions rules. The FCA states that notwithstanding its existing rules that require communications to be clear, fair and not misleading, there are nevertheless growing concerns about the misleading, exaggerated or unsubstantiated nature of some sustainability related claims.  The FCA consider it necessary to add a specific rule to the ESG Sourcebook to link the ‘clear, fair and not misleading’ principle directly to sustainability claims.   The new proposed rule will be more explicit as it can challenge any firm that it considers may be greenwashing its products or services and take enforcement action.

Potential additional FCA powers for overseas products

The FCA states that it would welcome additional powers to apply its proposed labelling and disclosure rules to overseas products so as to avoid confusion to UK consumers and that it is currently working with the Treasury to consider the options on how to treat these products and intends to follow with a separate consultation in ‘due course’.

The FCA letter is available here.

The original Treasury Sub-Committee letter and its response to the FCA letter can be found here.