New rules have come into force governing the claims made by sustainable funds.
As sustainable investing has grown in popularity, the issue of ‘greenwashing’ has moved into the spotlight. However, investors, turned fund detectives, have discovered that funds with ‘sustainable’, ‘environmental’ or similar labels are buying shares in companies which do not match the branding. Elsewhere, some sustainable funds seem to differ little from their ordinary counterparts, with perhaps just the obvious red flags, such as the oil majors, excluded.
At the end of May 2024, new Financial Conduct Authority (FCA) rules took effect designed to bring clarity to the sustainable investment sector. These require any reference to sustainability in product or service to be:
- Correct and capable of being substantiated: In other words, a product or service should do what it says on the tin. Any business promoting a sustainable product/service must be satisfied that there is suitable evidence to support the sustainability claims being made. Both the claims and the supporting evidence must be regularly reviewed.
- Clear and presented in a way that can be understood: Investment is prone to the use of jargon and sustainability can add another layer of opaque prose. The FCA wants any claims made to be ‘transparent and straightforward’. That can mean different things to different audiences, so one-size descriptions may not fit all. The regulator says that clarity extends to the images, logos and colours that are used, which could mean less green ink and fewer rainforests in marketing material.
- Complete – they should not omit or hide important information and should consider the full life cycle of the product or service: This requirement is designed to prevent the sustainable aspects of an investment from being highlighted, while suppressing or omitting less attractive features. The FCA gives an example of an investment financing energy efficiency improvement without also explaining that funds may be used to improve the efficiency of fossil fuel production and distribution.
- Comparisons to other products or services are fair and meaningful: Any claims making comparisons of the sustainability characteristics of products/services should be clear about what is being compared, how the comparison is being made and should only compare like with like.
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