Anti-greenwashing – are your investments truly “green”?

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

Interest in sustainable (or green) investing is on the rise in 2024. Over 50% of individual investors want to increase their allocations in “ESG-friendly” options next year (environmental, social and governance). Many are spurred by new climate science findings and the financial performance or diversification opportunities offered by green investments.

However, since ESG investments are still a relatively new concept (in wide historical terms), legislation has still been developing to regulate them. Now, the Financial Conduct Authority (FCA) has introduced a new rule to avoid “greenwashing” – i.e. the inappropriate labelling of investments as sustainable.

Below, our Grantham financial advisers explain the concept of “greenwashing”, how the new FCA rule works and what the implications could be for investment planning. We hope these insights are useful. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:

01476 855 585
info@casfin.co.uk

What is greenwashing?

Certain investment providers have noted investors’ rising interest in green investments and want a slice of the pie. Unfortunately, there is still no global rating that enables everyone to agree upon which investments qualify as “green”.

Take the fashion industry as an example. Here, firms often use long supply chains and energy-intensive production processes to meet consumer demand. However, green investors could be misled by fashion giants’ sustainability claims (a UN report found that 60% of these claims are “unsubstantiated” and “misleading”).

Similar examples can be found across many other industries. The lack of transparency can make it difficult for fund managers (let alone individual investors) to accurately discern the “sustainability credentials” of underlying fund investments.

In worse cases, managers might deliberately “greenwash” their funds to make them appear more sustainable than they really are. This practice undermines trust in the investment industry and can damage the environment. Fortunately, regulators are starting to take action.

What is the new FCA rule?

The Financial Conduct Authority (FCA) published guidance about anti-greenwashing in UK financial services earlier in 2024. The new rule finally came into force in May, helping consumers gain better access to accurately described financial services and products.

This builds upon the Sustainability Disclosure Requirements (SDR) for wealth managers already introduced in November 2023. Two examples of good practice were provided by the FCA, demonstrating where the new Rule applies:

Financial promotions (e.g. adverts for “green” funds must be fair, clear and not misleading – not omitting or hiding important information).
Communications relating to the sustainability-linked characteristics of products and/or services (e.g. emails from managers to clients about their “green” fund must be factually correct and capable of being substantiated).

Implications of the Rule

The new anti-greenwashing Rule is certainly a step in the right direction. Since there is no implementation period, consumers have benefitted from additional protections immediately since May 2024. At Castlegate, we welcome any legislation that strengthens the good practice of financial advice across the UK.

Clients must note that the Rule is not a panacea to greenwashing. There is still a risk that investors will misunderstand “green” investments without professional guidance. For instance, the new Rule focuses on claims made by FCA-regulated firms regarding products and services.

However, it is unclear how far the Rule extends to claims about firms themselves (although Rule ESG 4.3.1R suggests it does, and consumer protection law already applies). Moreover, the new Rule applies to clients in the United Kingdom. British expats may not enjoy the same level of protection, depending on their place of residence.

How to build a “green” portfolio

It is commendable to want to align your investments with your values. However, there is no universal, simple process to achieve this. Each client will require a bespoke approach based on their unique financial goals, circumstances and priorities. A financial adviser can help you navigate this process to achieve the best outcomes.

For instance, which “ESG” factors are most important to you? For some clients, building an environmentally friendly portfolio (E) will be paramount. Others may want to focus more on the “S” – e.g. companies that promote good labour practices, human rights and community engagement. Others may be more concerned with “G” – the leadership, audits, internal controls and shareholder rights of the firms in their portfolios.

Investment funds may claim to target these variables to different degrees and in different ways. Some may follow a “Negative” approach, which excludes any firms which produce negative impacts according to the fund’s criteria (e.g. fossil fuel companies). Others may take more of a “stewardship” approach to their underlying investments, influencing them to adopt more ESG practices and management.

This diversity allows for a high degree of flexibility for clients seeking to build an “ethical” or “sustainable” portfolio. A financial adviser can help you work through the complex ESG landscape and avoid the potential issues of a “DIY” investment approach. For instance, taking a “Negative” approach will ensure the best alignment between your investments and values. However, it could lead to diversification problems if not carefully managed (i.e. too much concentration of your portfolio in specific firms, industries or countries). A financial adviser can help you work through this.

Invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk