The Financial Conduct Authority (FCA) has issued a warning over industry attempts at greenwashing, as it pushes ahead with plans to regulate firms providing sustainability data and ratings.
A green finance roadmap published by HM Treasury in late October notes that the authority has taken a hard line against companies seeking FCA authorisation on the basis of lending against environmental, sustainability and governance (ESG) criteria.
“The FCA has received a growing number of low-quality authorisation applications from ESG-themed funds, many of whose sustainability claims did not stand up to scrutiny,” it says.
Greenwashing – defined by the Treasury as misleading or unsubstantiated claims about environmental performance – was the most frequently cited concern among institutional investors in a 2021 study by asset management firm Schroders.
But according to the roadmap, there are often data gaps and assumptions around external ESG ratings, particularly when compared to credit ratings.
The Treasury cites research by management consultancy Optimas suggesting the size of the ESG-related data market could reach US$1bn by the end of this year, but points out there are often different opinions across firms that make it difficult to compare their output.
In response, the government is considering bringing companies that provide ESG-related data and ratings within the regulatory scope of the FCA, with further details on the proposals expected next year.
FCA chief executive Nikhil Rathi adds: “It is essential that there is high-quality, reliable, and internationally comparable information on material environmental, social and governance factors right along the value chain – from corporates to financial services firms, and onward to clients and consumers.
“Better information will not only improve decision-making, but also help to build trust and combat potential greenwashing.”
The action on ESG criteria forms part of wider efforts to introduce legally binding climate-related disclosure rules for UK corporates.
The UK government is producing legislation that would require more than 1,300 large companies and financial institutions to provide details of their environmental impact, and the climate-related risks and opportunities they are exposed to.
The reforms are due to enter into force in April next year, subject to parliamentary approval.
They would apply to companies with over 500 employees and £500mn in turnover, and are intended to help investors and businesses “better understand the financial impacts of their exposure to climate change, and price climate-related risks more accurately”, the Treasury says.
The disclosure rules would be based on recommendations by the industry-led Taskforce on Climate-Related Financial Disclosures (TCFD), which are already used as a basis for disclosures by Tesco, Aviva and Unilever.
John Glen, economic secretary to the Treasury, says the reforms “will not only help tackle greenwashing but also enable investors and businesses to align their long-term strategies with the UK’s net zero commitments”.
The FCA has separately consulted on extending TCFD-aligned disclosure requirements to asset managers, pension providers and other regulated firms.
The reforms come as environmental campaign groups are pressuring banks to cut support for companies involved in deforestation, carbon emissions and other harmful activity.
A recent joint statement by 32 non-governmental organisations and campaigners, including Global Witness, Greenpeace and Climate Finance Action, points out that credit provided to forest-risk companies was 155% higher in the first half of 2021 compared to the same period last year.
“Many leading financial institutions that have committed to making deforestation a priority have done so merely by increasing conversations with companies involved in egregious and illegal practices, while overwhelmingly failing to exclude these companies from portfolios and financing,” it says.
“It is dangerous, not to mention outright greenwashing, to celebrate these same financial institutions as ‘leaders’ on forests.”
Following the first day of talks at the COP26 summit in Glasgow this week, leaders from more than 100 countries agreed a declaration on stopping deforestation by 2030, committing US$19bn towards that goal over the next five years.
But Tyson Miller, forest programs director at campaign group Stand.earth, says that aspiration “falls short of what’s needed to meet the climate change targets of the 2015 Paris Agreement”.