Financial regulator’s “lop-sided” plans to prevent investment funds from greenwashing need further work

9 March 2023

The Treasury Committee calls for the financial regulator to spell out whether victims of greenwashing will have to pay to move investments to funds properly labelled as ‘sustainable’.

The Financial Conduct Authority (FCA) is looking to introduce criteria that a UK investment fund would need to meet to describe itself as ‘sustainable’, ‘ESG’, ‘green’ or similar.

ESG (short for Environmental, Social and Governance) is a way of considering a business’s impact on society and the environment, and how transparent and accountable it is.

Following revelations that some ‘sustainable’ investments had invested in oil and gas giants Shell and ExxonMobil, funds were accused of greenwashing.

The Treasury Sub-Committee on Financial Services Regulations, which scrutinises regulatory proposals, warns that consumers who currently invest in funds guilty of greenwashing may have to pay to move their investments into new ‘sustainable’ funds.

The cross-party Committee of MPs is concerned that the FCA has not put a figure on how much this will cost consumers, and calls on the regulator to conduct a more detailed cost benefit analysis of its proposals.

The Sub-Committee is concerned that the regulator will not be seeking redress for customers who have been sold misleading investments. The MPs ask the regulator what enforcement work it will be doing to tackle funds who have misled consumers.

The MPs also ask if there is a risk that tighter regulations could drive funds away from ESG investing or out of the UK, reducing consumer choice.

Commenting on the correspondence, Harriett Baldwin MP, Chair of the Treasury Committee, said:

“Consumers who invested in funds believing they were doing their bit to save the planet must not be made to bear the cost of moving if they find out their fund isn’t so green after all.

“Without a comprehensive cost-benefit analysis, the regulator’s proposals are lop-sided. Further work on what the costs are going to be, who will pay, and how the regulator will enforce the rules is clearly necessary.”

The correspondence follows an evidence session in which industry representatives and the FCA were asked their views on the proposals.

In recent correspondence to the Committee, the FCA assumed that one third of funds currently claiming to be sustainable would no longer qualify for a sustainable label, and another third would decide not to use the label.

Update – the FCA responded to the Sub-Committee’s letter on 23 March, promising to consider the issues raised in the correspondence and oral evidence hearing. The response can be read here. On 29 March, the regulator updated its consultation.

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