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UK regulators are set to introduce four different green labels to help consumers pick sustainable funds, the Financial Conduct Authority announced Tuesday (28 November).

The move comes amid concern that many asset managers are “greenwashing” — making unfounded claims to cash in on the burgeoning, trillion-euro market for investment that’s environmentally and socially sound.

“We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs,” Sacha Sadan, director of environmental, social and governance (ESG) at the UK financial regulator, said in a statement. “This is a crucial step for consumer protection as sustainable investment grows in popularity.”

Under the proposed plans, set to take effect from July 2024, financial products that invest at least 70% of assets in environmentally friendly industries, such as green energy infrastructure, can benefit from a new “sustainability focus” label.

There are other labels for funds that target environmental improvements — such as companies with a credible path to achieve net zero emissions — or that seek a specific environmental or social impact, such as housing for the homeless, alongside a fourth for funds combining multiple strategies.

Overcooked

The FCA estimates some $18.4 trillion of ESG-oriented assets are now being managed across the world — but it’s not the only agency worried claims over sustainability can sometimes be overcooked, unclear or misleading.

In a document published today, global banking regulators said lenders should have to disclose the impact of climate change on their books, whether caused by extreme weather or fossil-fuel phaseouts.

“Physical and transition risks can have wide-ranging impacts across sectors and geographies … potentially affecting the safety and soundness of banks and the stability of the broader banking system,” said the document produced by the Basel Committee on Banking Supervision.

A study published on Monday by the European Central Bank — which has threatened to fine banks that don’t remedy environmental shortcomings — set out multiple ways in which the world’s biggest lenders can greenwash.

Bad practices highlighted in the ECB study include promising to stop funding phantom fossil fuel projects that banks had, in reality, never been involved with, and offering emissions-cutting targets that excluded 95% of exposures.

EU legislators are considering ways to toughen the financial sectors’ contribution to the green transition, including via a new directive on corporate due diligence — and are likely to require banks and insurers to set out how they’ll transition to a net zero world.

Verena Ross, who heads the EU’s securities and markets watchdog, promised new guidelines to counter greenwashing “shortly,” in a speech given to asset managers last Friday (24 November).

The European Commission is also consulting on new categorisations that could lead to environmental labels for financial products.