City watchdog warns over greenwashing with vague ESG targets

·2 min read
The London city skyline being painted green
The London city skyline being painted green

The City watchdog has warned that it will dish out fines to ethical investing rating agencies if they continue to provide vague sustainability targets.

The Financial Conduct Authority (FCA) said it had identified the “potential for widespread failings” following a review of benchmark compilers, which provide data on the environmental, social and governance (ESG) credentials of companies for investors.

In a “Dear CEO” letter, the FCA raised concerns that the benchmarks could lead to greenwashing and that the overall quality of those it had reviewed was “very poor”.

The regulator added that the methodologies for too many benchmarks were overly vague.

It said: “We are concerned that this can contribute towards or lead to greenwashing.”

ESG investing has increasingly come under fire in recent months with critics arguing that some companies and investors are using the catch-all term to “greenwash” – giving false information to promote an environmentally responsible image.

The regulator said that ESG ratings had been “increasingly embedded” in investment, and therefore transparency was important to prevent “potential harm to markets”.

In its letter, the FCA said: “High quality ESG benchmarks are important to support trust in the market for ESG products and the transition to a net zero economy.

“Where firms fail to consider our feedback, we will deploy our formal supervisory tools and, where appropriate, consider enforcement action.”

International regulators have been clamping down on companies and agencies that wrongly market their investment products as environmentally-friendly.

Last November, Goldman Sachs was fined $4m (£3.3m) by US regulators after it was charged with misleading customers about investments advertised as having an environmentally friendly focus.

Deutsche Bank's headquarters was also raided by German police last year over accusations of “greenwashing” its investments.

The FCA said: “We are working closely with Government on this, who are expected to shortly consult on whether and how to extend the FCA’s perimeter to include ESG ratings providers.”

Until then, the regulator said it would take action against ESG rating providers who do not address the failings it highlighted in the review.

It added: “We expect all benchmark administrators to have strategies to address the issues identified in this letter. We will be doing more work in this area to address the potential failings, and expect firms to be able to explain these strategies on request.”