The FCA has announced it will extend its Sustainability Disclosure Requirements (SDR) rules to portfolio managers.
It said the new rule is designed to protect consumers by ensuring sustainable products and services they are sold are accurately described.
This will include model portfolios, customised portfolios and/or bespoke portfolio management services.
The main aim behind the SDR is to “improve the trust and transparency of sustainable investment products and minimise greenwashing”.
Greenwashing is defined as the act of “making people believe that your company is doing more to protect the environment than it really is”.
The FCA estimates that $18.4trn of environmental, social and governance (ESG) assets are now being managed globally.
As part of its initial investigation, the regulator found that investors were not confident that sustainability-related claims made about investments were genuine.
This was made worse by the fact that firms showed a lack of consistency when using such terms as ‘ESG’, ‘green’ or ‘sustainable’.
Results from the latest Financial Lives survey shows 81% of adults surveyed would like their investments to do some good as well as provide a financial return.
Therefore, the FCA is consulting on extending to portfolio managers the requirements on how sustainable investments are labelled and explained.
The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023.
They include product labels to help consumers understand what their money is being used for and naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.
The FCA’s director of environmental, social and governance (ESG), Sacha Sadan, said: “Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment.
“Our good and poor practice anti-greenwashing examples will help firms market their products in the right way.
“We continue to work closely with the ASA and CMA to address greenwashing.
“Consumers care about investing in products that have a positive impact on the planet and people.
“That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money.”
Partner and greenwashing legal expert at Jenner & Block’s London office, Lucy Blake, said: “The FCA’s action is part of a wider trend of UK authorities taking action against greenwashing and the message to financial institutions is clear – the temperature is rising and green statements need to be meticulously substantiated.
“Companies face increasing pressure from investors, shareholders, consumers and regulators to operate ethically and sustainably, while remaining profitable.
“However, the more companies say, the greater the risk of saying the wrong thing.”
She said that “businesses that exaggerate their green credentials, even unintentionally, can face the wrath of regulators, who are armed with hefty fines”.
“It may be tempting for companies to batten down the hatches and say nothing at all to avoid scrutiny. But this is no easy way out,” she added.
“If companies remain tight-lipped about how they are mitigating environmental problems, they risk accusations of misleading investors and the market by obscuring the risks.
“Many companies find themselves walking a tightrope between greenwashing and greenhushing — damned for saying the wrong thing or damned for saying too little.
“The solution for companies caught in these crosshairs is honesty, transparency and a demonstrable commitment to positive change.”
Gemma Woodward, head of responsible investment at Quilter Cheviot, described the announcement as “the logical next step in the process”.
She added: “Having consistency across the investment landscape is going to be critical if the SDR labels are to be a success and that customers are not misled on the sustainable credentials of their portfolios.”
Woodward said that portfolio management services, be that model portfolios or bespoke offerings, have become increasingly popular in the last decade.
“While the burden will now increase on those providers, it is important consumers and advisers can accurately compare services and there is a level playing field for sustainable offerings – this will be particularly interesting for bespoke offerings, which should reflect the customer’s requirements.”
She described it as a “far-reaching piece of regulation from the FCA” and as such said it requires careful navigation.
“As the industry evolves, additional clarification on what can and cannot be said, particularly around the naming and marketing of funds and portfolios, will be crucial,” Woodward added.
“This works both ways in that we want to avoid ‘green hushing’ as much as preventing greenwashing.
“This is where an investment underplays its sustainable credentials so as not to inadvertently overstep the mark. It is a phenomenon already seen in the US and it is vital that we do not see it creep into the UK.
“For advisers, this also underscores the importance to be up to speed and trained in this area of investments.”
She said that clients will increasingly be asking about or for sustainable related investments, and as such the advice industry needs to have the confidence and skills to have those conversations.
“The FCA is working with advisers to help open these communication channels, but more needs to be done by everyone given the rules will come into force imminently.
“Given the rise in the use of model portfolios, this gives advisers another good opportunity to review their practices around sustainable investment.”
