Interest in ESG (environmental, social and governance) has boomed in recent years as investors and firms seek to make a profit while being kind to the planet.

But it has led to ‘greenwashing’ as more firms jump on the bandwagon.

The regulator, the Financial Conduct Authority (FCA), is now moving to clamp down on greenwashing in the ESG, ‘green’ or ‘sustainable’ sectors in a bid to protect investors and build trust and integrity.

It said that exaggerated, misleading or unsubstantiated claims about ESG credentials “damage confidence in these products”.

As such, it wants to introduce product sustainability labels and restrictions on how these terms can be used in product names and marketing for products.

The three categories of labels include those that have a sustainable focus (assets that are environmentally or socially sustainable); sustainable improvers (assets to improve the environmental or social sustainability over time) and sustainable impact (for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact).

Other proposed measures include disclosures to help investors understand the key sustainability-related features of investment products. This includes disclosing investments that people may not expect to be held in the product.

It also wants to introduce requirements for distributors of products, such as investment platforms, to ensure that the labels and disclosures are accessible and clear.

‘Confidence that products are actually sustainable’

Sacha Sadan, the FCA’s director of environment social and governance, said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.

“This supports investment in solutions to some of the world’s biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “It’s reassuring that the FCA is proposing robust rules to address greenwashing which is increasingly undermining consumers’ confidence in ESG claims.

“Our recent research showed that 58% of investors surveyed are not convinced by ESG claims from funds, up from 48% last year. Investors who do not consider ESG criteria are particularly cynical, with 55% saying they are not convinced by ESG claims from asset managers which doubled from 27% last year.”

Stone added: “We support the proposed simplification of the investment labels down to three main categories which will ensure the regime will work effectively for consumers. It’s encouraging that the ‘sustainable focus’ label sets a high threshold, namely 70% investment into environmental and social sustainability projects.

“The ‘sustainable impact’ label is especially welcome as investment companies are particularly suitable for these investments. They provide permanent capital and are able to invest in hard-to-sell assets like renewable energy infrastructure and accommodation for vulnerable people.”