New “naming and marketing” guidelines for sustainable investment products have been formally implemented by the Financial Conduct Authority (FCA) in an effort to improve transparency and prevent greenwashing in the financial industry. These corporate sustainability guidelines form part of the broader Sustainability Disclosure Requirements (SDR) regime.
About the sustainable investment regime
The SDR regime strives to ensure accurate representation of green claims and tackle the growing problem of greenwashing in the financial sector. It was introduced in stages throughout 2024, starting on May 31st with the enforcement of anti-greenwashing rules. This was followed by the rollout of investment labels on July 31st.
On December 2nd, the new rules governing the naming and promotion of sustainable investment products went into effect. They require firms to adhere to strict standards concerning advertising, disclosures, and labelling. Under the rules, terms like ‘impact’ ‘green’, ‘sustainable’, ‘ESG’, ‘climate’, and ‘Paris-aligned’ can only be used if they truly reflect a fund’s investment strategy and sustainability characteristics.
The FCA has mandated that such characteristics must be both integral and substantive to the fund’s goals, strategies, and policies. For instance, a minimum of 70 percent of the fund’s assets must demonstrate sustainability characteristics for the fund to use these sustainability-related terms in its names.
This ensures that the fund’s green claims are grounded in tangible investment practices rather than being misleading or superficial. These rules are part of the FCA’s broader efforts to establish trust in sustainable finance. They are doing this by aligning naming conventions with pre-existing guiding principles in responsible investments.
Along with naming conventions, the rules will also apply to financial promotions. In other words, managers promoting sustainability products to retail clients in the UK must make sure their promotional materials align with the product’s sustainability label, pre-contractual information, consumer-facing disclosures, and the sustainability report.
Supporting the financial sector as they transition
The overarching goal is to offer investors clear, credible, and consistent information about the product’s sustainability attributes. Managers who do not use a sustainability label but still want to promote a product using green terms must meet further requirements. This includes compliance with detailed rules on substantiation and disclosure of claims.
However, the FCA has recognised the challenges firms face in meeting the new requirements and is offering temporary flexibility for UK-authorised investment funds. This temporary measure will be effective until April 2nd, 2025, and aims for a smoother transition. Those firms benefitting from the flexibility must show their sustainability claims are being addressed proactively, even as they work to achieve full compliance. The FCA has also issued its own guidance to help the sector meet the new standards.
Summary
By introducing stricter guidelines on the use of terms like ‘green’ and ‘sustainable,’ the FCA is tackling greenwashing head-on, ensuring sustainable investment products align with their stated environmental goals. These regulations are pivotal in building trust among investors and fostering a more accountable financial sector that supports genuine sustainability efforts.
While temporary flexibility has been granted to ease the transition, firms must proactively address the new requirements to demonstrate their commitment to accurate and meaningful green claims. As the financial sector adapts to these changes, the FCA’s initiative is poised to set a higher standard for corporate sustainability, ensuring clarity, consistency, and integrity in the promotion of sustainable investment products.
