Fund labelling regimes help stamp out greenwashing

A European Union ban on using green terminology in the names of funds that are not invested sustainably has seen 500 of them renamed, said Antonio Barattelli, head of the investment management unit at the European Securities and Markets Authority (ESMA), on May 21.

Further evidence that a labelling regime was needed could be seen from ESMA’s review of Europe’s largest 20 asset managers, Barattelli said, during a panel discussion at the Association for Financial Markets in Europe (AFME) sustainable finance conference in Amsterdam. Sixty-six per cent of them had changed their fund names, with half removing green terminology entirely.

This proved the importance of ESMAʼs guidance in bringing “some discipline”, which helped ensure that the “promise that is made to an investor is fulfilled”, he added.

Meanwhile, 57% asset managers in the review had adapted their investment policy to better explain the types of investment a fund would make following the introduction of the labelling regime.

Going second

In the UK, labels for sustainable products were introduced by the Sustainable Disclosure Regime (SDR). The regime was designed to be “consumer facing from the start”, said Fayyaz Muneer, deputy director of prudential policy and sustainable finance at HM Treasury, said during a keynote at the conference.

Another speaker, Sacha Sadan, director of sustainable finance at the Financial Conduct Authority (FCA), agreed the UK regime was designed to “speak the language of people who want to buy these products” from the outset. The UK had learnt from the EU’s experience when developing SDR, he added: “It’s very easy to go second after someone has perhaps made a few mistakes.”

Consumer testing had led to a rethink on the FCA’s proposed SDR labels, which are now used by around 130 funds. Initially, the plan was to have a “transitioning” label. However, testing showed consumers did not understand the term, prompting a pivot to the label “improvers”.

The FCA also tested different lengths of disclosure documents with consumers. “We gave them a 10-page disclosure document, a four-page disclosure document and a two-page disclosure document,” Sadan said. “Guess what? They got the same amount of information from the two-page as the 10-page [document].”

The result was that every fund wanting to use a [SDR] label now has to explain the main key facts to consumers in just two pages.

Greenwashing

Sustainable finance was popular with the British public, Sadan said.

“Weʼve just done our Financial Lives Survey of 17,000 consumers in the UK. One of the big questions we asked them was, ‘would you like to be told about responsible investment when youʼre investing your money or your pension?’ and 76% said yes,” he said.

Labels helped reduce greenwashing because they enabled consumers to “know what was going on”.