ESG (environmental, social, governance) and sustainable investment approaches are being integrated more extensively into the strategies of asset managers. According to PwC estimates, ESG-related assets under management (AUM) could reach $33.9 trillion by 2026, an increase from $18.4 trillion last year.[1] Amid this growth, however, greenwashing has become a real problem within the industry and one that threatens its credibility.
Some regulators – including the EU and now the UK FCA (Financial Conduct Authority) – want to tighten the rules on managers making sustainability claims, and require them to specifically define their goals and methods around sustainable investing.
For instance, the FCA is looking to clamp down on managers mislabelling their funds as being green while simultaneously creating a framework to support investors when looking for sustainable funds.
So how will the FCA go about this?
Firstly, the FCA is proposing three separate labels for funds – ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’.
There will also be restrictions on how certain sustainability-related terms such as ‘green,’ ‘ESG’ or ‘sustainable’ can be used in product names and marketing for products which do not qualify for the sustainable investment labels. The FCA also added managers should make additional disclosures to clients who want more information about a product’s sustainability.
This comes not long after the FCA wrote a “Dear Chair” letter, in which the regulator described some of the more egregious instances of asset managers making unsubstantiated claims about sustainability to investors.
For example, the FCA observed that one purportedly sustainable investment firm contained two high carbon emissions energy companies in its top 10 holdings, without providing any context or rationale behind it (i.e. a stewardship approach that supports companies moving towards an orderly transition to net zero).
The FCA is the latest regulator to clamp down on greenwashing. The EU is widely considered to be one of the most advanced markets when it comes to ESG having introduced the SFDR (Sustainable Finance Disclosure Regulation) and the Taxonomy for sustainable economic activities.
The US is starting to take a tough line on managers misrepresenting their ‘green’ credentials as well. Earlier this year, the US Securities and Exchange Commission (SEC) announced plans to target asset managers with misleading fund names, by demanding firms prove that 80% of their holdings match the names given to their funds. In other words, if a fund has green in its title, then 80% of its underlying assets should be green.
The SEC is also recommending that funds and advisers provide more specific disclosures about their strategies in prospectuses, annual reports and adviser brochures. In the case of managers who claim to be making an environmental impact, they will be required to publish the greenhouse gas emissions associated with their underlying portfolio investments.
ESG and sustainable investing have been littered with challenges, not least because some managers have made spurious claims about sustainability. One of the reasons why this has been allowed to happen is the lack of regulation in the new market.
Although new regulation is welcome – if it improves standards and safeguards investors against miss-selling it is vital that there is a degree of harmonisation between what different market supervisors are doing in terms of their policies – otherwise it risks sowing confusion, and undermining the industry’s push towards ESG and sustainable investing.
IIMI will be looking to provide feedback to the FCA on these proposals. As part of this, IIMI will be gathering the opinions of its members, particularly those in the IIMI ESG Network. Any correspondence or opinions on this issue should be sent by IIMI members to the executive committee.
[1] PwC – October 10, 2022 – PwC’s Asset and Wealth Management Revolution 2022 Report