Investing pension savings for growth and sustainability under new UK anti-greenwashing rules

12 Dec 2024

There has been a great deal written about the need for pension savings to work harder for savers - delivering higher returns through more investment in illiquids, investing in private equity, infrastructure, property and private credit amongst others.

This focus on improving returns, especially for DC pension savers, led to the establishment of open-ended Long Term Asset Funds (LTAFs) which were finally given FCA approval on 29th June 2023. Later that same summer, the focus on achieving better returns was further boosted by the so-called Mansion House Compact as the then Chancellor Jeremy Hunt announced that he had secured the commitment of many of our largest pension providers to invest five per cent of their default pension funds into unlisted equities by 2030.

So, if pension savings can be boosted by higher returns, can more of our savings also be directed to addressing one of the most pressing longer term problems of our age – the climate crisis? After all, the FCA’s 2022 Financial Lives consumer study found that 74 per cent of UK adults agreed that environmental issues are really important to them and 79 per cent agreed businesses have a wider social responsibility than simply making a profit.

New UK sustainability investment labels

To this end, the FCA has also been working away to secure consensus on how to regulate the measurement, validation and disclosure of the sustainability credentials of assets and prevent so-called greenwashing (misrepresenting the environmental credentials) by companies, asset managers and by extension investment advisory businesses.

The UK’s new environmental and societal disclosure regime called ‘Sustainability Disclosure Requirements (SDR) and investment labels’ was encapsulated within the FCA’s Policy Statement 23/16 published back in November 2023. Authorised fund managers began using the four new investment labels, with accompanying disclosures linked to funds’ sustainability objectives, from 31st July 2024.

The SDR focuses on two key elements: the naming and marketing of investment products. It offers a tiered product labelling regime designed to help investors understand what their money is being used for based on declared sustainability goals and criteria. The four tiers are: Sustainability Impact, Sustainability Improvers, Sustainability Focus and Sustainability Mixed Goals. An SDR labelled product must state its sustainability objective. They demand managers to have adequate knowledge and understanding of the assets and strong due diligence around checking and evidencing progress in line with declared sustainability objective of a fund.

Investment labels therefore have the following key ‘qualifying criteria’:

Sustainability objective
Investment policy and strategy: with for example 70% or more of a product’s assets in line with the declared sustainability objective for Sustainability Focus-labelled funds
KPIs used to measure progress against stated sustainability objective: this is particularly important for ‘Sustainability Improvers’ labelled funds.
Resources & governance: must ensure you have appropriate resources, governance and organisational arrangements to support delivery of the sustainability objective.
Stewardship regime: disclosing stewardship strategy to support the delivery of the sustainability objective.

FCA's new UK anti-greenwashing rules (FG24/3)

The FCA’s new anti-greenwashing finalised guidance (FG24/3) which have been enforceable since the end of May this year, clarifies that all references to sustainability credentials should be:

Correct and capable of being substantiated
Clear and presented in a way that can be understood
Complete – they should not omit or hide important information and should consider the full lifecycle of the product or service
Fair and meaningful in relation to any comparisons to other products or services.

Anti-greenwashing rules more directly impact IFAs and other advisory businesses because they apply when any authorised firm communicates with UK clients in relation to a product or service, or communicates a financial promotion (or approves a financial promotion) to a person in the UK.

It’s very broad brush in terms of what type of communication can be checked for greenwashing claims. The FCA can run its anti-greenwashing slide ruler over references to sustainability characteristics (social or environmental) in communications that include: “statements, assertions, strategies, targets, policies, information, and images relating to a product or service.”

Anti-greenwashing is also about building confidence and driving adoption of ESG positive products or as the FCA writes in its guidance “improving consumer confidence and trust, and enhancing the transparency, credibility and integrity of markets. If consumers trust the sustainability-related claims firms are making about their products and services, this increases confidence in markets and the flow of capital into products that can genuinely drive positive change.”

As is often the case with FCA regulation, much of the burden of proof will fall on the regulated entity rather than on the regulator. You will need to keep detailed records to be able to substantiate the labels you have chosen to use. Those records will need to cover not only your descriptions and the source material that substantiates them, but also keeping evidence of a feedback loop that shows you are checking what clients understand by them and improving your clarity where the understanding is incomplete. In addition, the UK Green Taxonomy, which also supports efforts to stop greenwashing, is also not yet fully defined and consultation on finalising it is nearly a year late in starting. Firms wanting to reduce the risk of green washing allegations will, over time need to ensure ESG reports conform with UK Green Taxonomy rules. So, that’s another topic to watch out for from early next year.

Lack of ESG reporting level playing field

There are still a few other gaps and inconsistencies under the bonnet in terms of ESG reporting of firms that you may hold in clients’ portfolios. For example, there are complications around which ESG disclosure regime listed businesses should use for their reporting, and many are using several at the same time.

The UK regulator appears to favour the International Sustainability Standards Board (ISSB) which went live with its first sustainability-related reporting standards just over a year ago and demands Scope 3 reporting for example. Other listed businesses favour the Global Reporting Initiatives’ Standards (GRI). The so-called GRI Standards provide the world’s most comprehensive and widely used standards for sustainability reporting - helping organisations understand their outward impacts on the economy, environment, and society, including those on human rights.

Still others prefer to use the UN Sustainable Development Goals (SDGs). The UN SDGs are a collection of 17 interlinked global goals designed to be a ‘blueprint to achieve a better and more sustainable future for all’. The SDGs were set up in 2015 by the United Nations General Assembly and were originally all intended to be achieved by 2030. Many European-based firms favour Taskforce on Climate-Related Financial Disclosure (TCFD). The lack of a common environmental disclosure system by the companies that fund managers are selecting naturally makes accurate and comparable investment product labelling much trickier.

How can advisers, platforms and investment managers alike ensure their products deliver alpha performance while also tracking or beating the wide range of ESG benchmarks and staying within desired investment labels they have begun assigning to their funds? Right now, it’s a big task, although the quality of ESG reporting and, perhaps more importantly, accurate comparability of ESG performance, is set to improve considerably over the next year now that the SDR and anti-greenwashing regime has gone live.

Expect to see some UK funds drop ESG from their names

One impact of the EU equivalent of SDR going live is the beginning of a wave of EU-based funds being forced to drop ‘ESG’ from their names to avoid falling foul of new European Securities & Markets Authority (ESMA) rules designed to clamp down on greenwashing. Morningstar predicted that over 1,600 EU funds will have to do this by now. We can expect the same renaming of funds to happen here in the UK as anti-greenwashing rules begin to be enforced by the FCA.

For advisory firms, it's also worth considering the cross-over between anti-greenwashing and Consumer Duty obligations which demand that market participants:

Act in good faith
Avoid foreseeable harm
Enable and support retail customers to pursue financial objectives (“including sustainability related needs and preferences in investment objectives”, according to the FCA)

Will Consumer Duty lead to pressure on platforms, as well as advisers, to withhold access to certain investments where a particular fund has performed badly in ESG terms? Hopefully not, as the evidence we have seen already of platforms blacklisting funds for poor charges disclosure, is that it’s very unpopular with clients.

Accurate, tailored and timely ESG disclosure will be enabled by technology

It seems natural that a majority of your clients are likely to want to invest their pension savings not only for growth but also to protect and nurture the planet and society. So, keeping a close eye on how funds and stock picks in their investment portfolio are doing in terms of ESG, can only become more important.

Interpreting and tailoring timely disclosure of ESG-related information to meet the needs of the consumer will undoubtedly fall on advisers and platforms. It will be important to run regular checks to ensure there is no risk of falling foul of anti-greenwashing rules. Technology can be brought to bear to order and prioritise the right data, tailor communications and optimise the effectiveness of client communications of ESG performance data, just as it has enabled communication of investment performance within the strictures of an admittedly heavily mandated pension disclosure regime today.

A critical part of this journey is taking the hearts and minds of clients with us along the road to investing for good as well as for gain. This should not be an exercise that we only do because FCA says we must. It needs to be part of the growing culture around the sentiment “my savings are good for me……and good for my neighbours too”.

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