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FCA takes firms to task over greenwashing

Day Three of the COP26 summit in Glasgow, dubbed “Finance Day”, took aim at the practice of  “greenwashing” and resulting lack of corporate accountability, stating that public companies and financial services firms will need to be more transparent about their environmental credentials.

UK Chancellor Rishi Sunak unveiled sweeping reforms of the financial and corporate system, with new requirements for firms to publish net zero transition plans that explain how they intend to decarbonise over the next decades to 2050.

The third day also saw the Glasgow Financial Alliance for Net Zero issue an “ambitious body of work” to address several major climate finance challenges, including defining net zero pathways for carbon-intensive sectors, aligning on what constitutes a robust transition plan for corporates and financial institutions, and a sector-wide plan to mobilise capital needed for decarbonisation in emerging markets.

“Collectively, this work will accelerate the implementation of net zero commitments and help to rapidly scale capital flows to support the net zero transition,” said the alliance, which is led by  the Bank of England’s former governor, Mark Carney.

FCA findings

The Chancellor’s announcement was accompanied by the publication of a discussion paper by UK watchdog the Financial Conduct Authority (FCA), proposing its own plans to codify what is meant by environmental, social and governance (ESG) investing and credentials.

A recent Financial Lives survey published by the FCA found that 80% of survey respondents wanted their investments to ‘do some good’, while also providing a financial return, 71% wanted to ‘invest in a way that is protecting the environment’ and the same number would not put their money into ‘investments which are unethical’.

“If the financial sector is to respond effectively to this growing demand and help encourage positive change across the economy, consumers need high quality information and clear standards,” said the FCA’s CEO Nikhil Rathi.

An end to greenwash

The FCA has been warning the finance industry about the practice of over greenwashing, as it pushes ahead with plans to regulate firms providing sustainability data and ratings.

A green finance roadmap recently published by HM Treasury notes that the authority has adopted a hard line when companies seek FCA authorisation based on 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 commented. 

Greenwashing is defined by the Treasury as misleading or unsubstantiated claims about environmental performance and was the most frequently cited concern among institutional investors in a 2021 study by asset management firm Schroders. According to the roadmap, data gaps and assumptions around external ESG ratings are frequent, particularly when compared to credit ratings. 

According to Rathi: “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.” 

Legislation being developed by the UK government – and due to be introduced in April 2022, subject to parliamentary approval – will 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 new rules will apply to companies with over 500 employees and annual turnover of £500 million and above and aim 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. 

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