News and Analysis | Author: David Macdonald | November 11, 2022

The new rules to tackle greenwashing

When Path was established in 2019, no one was really talking about sustainable investment. Much has changed in the past few years. Increasing awareness and concern about climate change amongst consumers has led to a boom in green finance.

Many finance firms and advisers have seen this as an opportunity to attract customers by using green finance terminology like ’ESG’, ‘green’ and ‘sustainable’. This can be misleading. We call it the ‘50 shades of green problem’. When nothing is in place to define what green is, it’s easy for a private institution or fund manager to claim they’re green when really, they could be anything but.

Greenwashing has dented consumer confidence and trust. Worst of all, it has misled clients at this time of existential crisis, when they need to be able to confidently invest in line with their values. It is a topic that has been the subject of much debate in the financial industry, and the Financial Conduct Authority (FCA) has now published its Sustainability Disclosure Requirement (SDR) and Investment Labels consultation paper.

Under the new rules, the FCA has proposed three new labels for sustainable investments, designed to help investors to identify the funds and trusts that are as ethical as they claim. The labels are:

• Sustainable focus: Sustainable focus funds must be at least 70% invested in assets that meet a credible standard of environmental and/or social sustainability.
• Sustainable improvers: these are assets that may not be wholly sustainable now, but are aiming to be in the future. This is aimed at investors who are aiming to improve companies by owning them. Sustainable improver funds and trusts must clearly state where they will and won’t invest, their policies to influence companies and how they’ve influenced firms.
• Sustainable impact: if you want to drive real-world changes, then his one is for you. Sustainable impact funds and trusts must have an explicit objective to achieve a positive and measurable contribution to sustainable outcomes.

Path welcomes the publication of the FCA’s paper. This is a very important, positive and overdue milestone for retail investment and sustainable investment in particular. It puts the needs of the investor first and tackles the “50 shades of green” greenwash problem head on. It’s also good to see this come from continued industry collaboration and consultation.

The clearer labelling should hopefully help to give investors greater confidence in their ethical investment decisions.  However, what is lacking at this stage, and what needs to be urgently addressed is how the labels will be measured and policed. It will also take time for these regulations to be put in place – it could be 2024 before the regulations  are fully enforced.

Given the scale and urgency of the climate crisis, it remains to be seen how much of a positive impact the new rules will have. We need greater awareness amongst consumers – and quickly – so that they know how to invest responsibly.

With this in mind, here are our tips for investors to avoid being greenwashed:

• Get your head around the lingo: whilst the FCA is clamping down on the use of words like responsible, sustainable and ESG to describe financial products, you can still expect these buzzwords to stick around for some time. Take a look at our handy guide to ethical finance jargon for a breakdown.
• Do your research: have a detailed look at the company you’re wanting to invest with – their website, marketing materials, reviews and testimonials, and anything that’s been written about them in the trade press.
• Consider the UN’s SDG Goals, covering issues such as poverty, education, equality and climate action. If your financial provider is able to map your finances according to these goals, then you can be confident that you are investing in a way that will help build a more sustainable future.
• Look into impact investments, not just ethical investments: Ethical investing generally excludes areas such as alcohol, tobacco, gambling and pornography, but polluting companies that cause damage to the environment are often still included. Impact investing not only excludes companies that have a negative impact, but includes companies that make a positive impact on the environment.
• Consider a B-Corp, one of the most demanding certifications to evaluate the social and environmental impact of an organisation. If your financial provider is a certified B-Corp (like Path Financial!), you can be assured that they are working hard to make a difference to the planet.
• Are they transparent? If your fund is purporting to be ethical, you should expect transparency to be part of the package. If a fund’s full holdings are not available, then question why not.
• Ask about fossil fuels: if there’s fossil fuel investment anywhere within a fund, that should be an absolute no-no.
• Remember that going green doesn’t mean sacrificing performance. If your financial provider suggests that it does, then alarm bells should start ringing. We strongly believe that it will be the companies that aren’t damaging the planet that will have the strongest long-term growth.
• Be prepared to switch. If it turns out the company you’ve gone with isn’t eco-friendly after all, you may want to change. Whilst it may be time-consuming, it could save you a headache further down the track.

If you want to be sure that your savings and investments are truly aligned with your beliefs, we can help. At Path Financial, we help people to invest with integrity. Our clients’ pensions and investments are invested only in companies and funds that are driving positive change for a more sustainable world – we don’t do anything else. If you want to find out more, get in contact with us for a chat.