FCA Calls for High-Quality ESG Benchmark Disclosures to Prevent Greenwashing
The Financial Conduct Authority (“FCA”) has sent a letter to CEOs following its portfolio letter to benchmark administrators. It outlines the supervisory priorities and view of the risks within the sector.
Within the recent Dear CEO Letter, the FCA expressed its concern over the quality of disclosures made by a sample of UK benchmark administrators regarding environmental, social, and governance (“ESG”) factors. The FCA’s preliminary review found that many benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies. Some firms failed to fully implement the disclosure requirements introduced in the Low Carbon Benchmarks Regulation (UK version of Commission Delegated Regulation (EU) 2019/2089). The findings highlight the potential risks of poor disclosures by firms.
The FCA has warned that the quality of benchmarks may not align with the expectations of users and end investors, which could negatively impact trust in the market for ESG-labelled products and the transition to a net zero economy.
Rules to Tackle Greenwashing
In October 2022, as part of its ESG strategy, the FCA introduced a new ‘Anti- Greenwashing Rule’, primarily focused on investment products. The rule will reiterate the requirement that all regulated firms making sustainability-related claims must ensure these are clear, fair and not misleading. Claims must also be proportionate to the sustainability profile of the product or service and exaggerations must be avoided. The FCA has warned that if brought into force, this rule would apply to benchmark administrators alongside their obligations under the UK Benchmarks Regulation (UK BMR).
Expectations and Next Steps
The FCA has set out its assessment of the risks observed and the issues identified based on its preliminary review, and expects benchmark administrators to carefully consider the messages set out as they pertain to their business. They should ensure that appropriate strategies are in place to address the identified risks and be prepared to explain these strategies at the FCA’s request. The FCA will take a holistic approach when considering the risks of harm related to ESG benchmarks across the value chain. The regulator will deploy formal supervisory tools, and where appropriate, consider enforcement action in line with their Approach to Enforcement for firms that fail to consider their feedback.
The FCA’s Priorities for a More Sustainable Future
ESG matters are high on the FCA’s regulatory agenda with the regulator calling for high-quality information, a well-functioning ecosystem, and clear standards for the financial sector to help support the transition to a more sustainable future. With the potential for widespread failings identified, the FCA’s ESG Benchmarks Review emphasises the importance of addressing these issues to prevent greenwashing and build trust in the market for ESG-labelled products.
There is no doubt of the perils on the horizon should firms fail to comply with ESG rules and regulations. This could pose financial and reputational damage in the form of fines and firms should ensure they have the correct framework in place to meet ESG requirements.
How can Complyport help?
At Complyport we are supporting many firms with implementing ESG requirements through:
- Compliance framework review to assess the impact of ESG requirements across the business
- Formulating roadmaps to implement this timely and efficiently
- Assessing the effectiveness and completeness of a roadmap
- Testing and reviewing
- Policy and procedure updates
Please contact Jan Hagen for any questions and assistance regarding ESG implementation plans via email at email@example.com to book in a free consultation.
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