FCA announce anti-greenwashing rules for investments, savings and more

The Financial Conduct Authority (FCA) has announced sweeping reforms, with strict rules on the use of sustainability terms and new labels to identify green investments.

FCA research found that 81% of people would like their money to do some good while providing a return. But it also found that consumers struggled to identify the right products, owing to vague language such as ‘green’ and ‘ESG’ (environmental, social and governance) being used liberally and sometimes without much foundation.

From 31 May 2024, environmental claims made by FCA-regulated firms will have to be backed with evidence.

Later, on 31 July, new labels for sustainable investment funds will be introduced to help consumers pick funds that meet certain standards.

The proposals follow repeated Which? warnings that investors, plus current account and savings account holders, were unable to take control of where their money was going.

The problem with greenwashing

Plenty of financial products are described as ‘green’ or ‘ethical’ – but until now these claims have been largely unregulated by the FCA.

Our research previously found that investment funds with the ESG label invested in fossil fuel giants such as Chevron and Exxon, as well as companies linked to the destruction of the Amazon rainforest such as McDonald's, Mondelez and Nestlé. 

This is despite two thirds of Which? members investing in ESG funds who were surveyed in January 2022 being fairly or very confident that they weren't invested in these types of companies.

A lot of ESG or sustainable funds currently on the market end up very heavily geared towards tech companies. This is because the funds take a standard index, such as the S&P 500, and apply exclusions on companies directly dealing in fossil fuels, tobacco or weapons.

Until now, there has been no clear distinction for consumers between these types of funds and funds geared towards investing directly in something like green energy.

• Find out more: ethical investing explained

The anti-greenwashing rule

The FCA has proposed new requirements that any references to a product’s sustainability must be consistent with the sustainability characteristics of the product or service, as well as being fair, clear and not misleading.

The rules will apply to all FCA authorised firms– whether that be current and savings account providers, insurers, financial advisers, pension funds or any other organisation. 

It will also apply to any form of communication, and references could be in the form of adverts, statements, policies, information or images. So, if a firm wanted to advertise a ‘green’ savings account, it would now need to be able to prove that the account's sustainability characteristics were strong enough to justify it.

For investment funds, the information relating to the fund’s sustainability will be enclosed in a document alongside the factsheet and prospectus.

The FCA has pushed back the date of enforcement of the anti-greenwashing rule from an immediate start to 31 May 2024, to allow firms time to comply.

Investment fund sustainability labels

Fund managers will be able to use fund labels from 31 July 2024 that identify their fund as one of the following:

• Sustainability impact - funds that invest in assets directly making a positive impact
• Sustainability focus - funds that invest in assets meeting a robust, evidence-based standard of sustainability
• Sustainability improvers - funds that invest in assets that have the potential to meet a robust, evidence-based standard of sustainability
• Sustainability mixed goals - funds with this label invest in a mix of the above styles.

To qualify for these labels, at least 70% of the assets held in a fund must be invested according to the sustainability objective set out by the fund’s manager, which must fall into one of the above four categories..

The remaining 30% of assets can't be in conflict with the objective, although they don't have to meet it exactly. For example, a fund might need cash or other assets for liquidity.

Funds in each label must also meet stewardship requirements, where fund managers support the companies they're invested in to meet whichever sustainability objective they've set out.

For passively managed funds tracking an index, the index must itself align with the criteria of the label.

Enforcing the new fund labels

A firm will be responsible for its product's label, meaning it notifies the FCA of its use of the label rather than applying to the FCA for approval. 

However, the FCA's fund authorisation team will regularly check if products line up with the requirements. If not, the firm will have to notify investors that the label has been either revised or removed. The FCA has said there will be no publicly available list of which funds have labels.

Out of 630 funds currently using some form of sustainability language, the FCA estimates that 45% will be eligible for a label.

Funds that don't meet the criteria for a label will not be able to use terms such as 'sustainable' at all, although other words such as 'responsible' or 'ESG' will be allowed – subject to the abovementioned anti-greenwashing rule. 

This aims to allow funds to explain if they exclude companies invested directly in fossil fuels, tobacco, or weapons but don't do any other work to meet sustainability standards, for example. 

• Find out more: Britain's greenest banks revealed

Other ways to find sustainable investments and savings

• Talk to a specialised financial adviser - if you don't want to pick investments yourself, an independent financial adviser can help. Look for one who is part of the UK Sustainable Investment and Finance Association.
• Current accounts - you can read our assessment of how banks invest the money you hold in your current accounts, and find the banks that stand out on fossil fuel financing, with our guide to Which? Eco Providers for current accounts.
• Savings accounts - all our Eco Providers also offer savings accounts.
• B-Corps - Coventry Building Society, Coutts, and Triodos Bank are the first B-Corp financial firms. The B-Corp certification is given out by a non-profit called B Lab, and is awarded to organisations that demonstrate high social and environmental positive impact, an accountable governance structure and transparency in their business practices.