Many retail funds fall short in sustainability labelling, UK watchdog says

By Huw Jones

LONDON (Reuters) -Many retail investment funds fall short when it comes to accurate labelling of their sustainability features, Britain’s Financial Conduct Authority (FCA) said on Thursday.

Trillions of dollars have flowed into investment funds that tout their environment, social and governance (ESG) credentials, prompting regulators to worry about ‘greenwashing’ or investors being taken in by exaggerated climate-friendly claims.

The FCA on Thursday published a review on how funds are labelling themselves ahead of new sustainability disclosure requirements (SDR) for asset managers, mirroring similar rules already introduced in the European Union.

“While progress has been made, the FCA has found that many firms still have further to go to meet its expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers,” the watchdog said in a statement.

Despite some funds referencing ESG or sustainability in their title, some did not have explicit ESG or sustainability objectives, the FCA said.

Some funds were unable to explain how their holdings were consistent with the ESG or sustainability characteristics of the fund, it added.

A key shortfall was the failure to include so-called Scope 3 carbon emissions from a company’s value chain, “even though these are often the majority of a fund’s carbon footprint”, the watchdog said.

The FCA said it expects firms to address the good and poor practices outlined in its report to meet the requirements of the SDR and the watchdog’s new consumer duty, introduced in July, which toughens up consumer protection.

Nathaniel Lalone, a partner at Katten Muchin Rosenman lawfirm, said trust in sustainable funds is critical for Britain to reach its net zero targets.

“Market participants should be prepared for the FCA to have little patience for poor behaviours in this space,” Lalone said.

The introduction of mandatory disclosures in Britain, the EU and elsewhere will give regulators firmer legal underpinning to crack down on greenwashing.

(Reporting by Huw Jones; editing by Jason Neely, Elaine Hardcastle)