Will investors pay to switch out of greenwashed funds? MPs demand answers from FCA

MPs have called for the FCA to “spell out” whether retail investors will have to bear the costs of moving from greenwashed funds into products approved by the regulator as sustainable.

The Treasury Committee today chastised the FCA’s Sustainability Disclosure Requirements (SDR) proposals, calling for further work to be conducted on the “lop-sided” draft reforms.

In a letter to the FCA’s chief executive Nikhil Rathi the Treasury Sub-Committee on Financial Services Regulations criticised three main areas of the draft.

The letter says a more detailed analysis of the costs to consumers of switching out of inappropriate products is “clearly necessary”. It also raises concerns over the FCA’s lack of enforcement plans against firms making ‘misleading claims’ on the green credentials of their products. The risks associated with the SDR’s divergence from other internationally comparable regimes has also been asserted in the letter.

The cross-party group of MPs opened an inquiry last month to examine the regulator’s draft fund labelling regime and investigate whether existing ‘sustainable’ funds are misleading retail customers by greenwashing.

In an evidentiary hearing, the FCA’s ESG director left the sub-committee in “shock” over an alleged lack of research into the potential cost implications for retail investors resulting from the implementation of SDR.

The MP’s concerns centred around the potential switching-costs a retail investor may incur, should they wish to divest from a fund previously marketed as ‘sustainable’, into one that has formally qualified for an SDR label once the reforms come in force.   

The cost-benefit analysis provided by the regulator, which is required by law, “falls short” in not considering both the financial and time costs to consumers, the sub-committee said.

The letter follows the sub-committee’s chair Harriet Baldwin’s promise to “follow up with you on some of those questions” regarding costs to consumers at in her closing remarks at the inquiry. The chair has requested a response to today’s letter by 23 March.

Commenting on the correspondence, Harriett Baldwin said: “Consumers who invested in funds believing they were doing their bit to save the planet must not be made to bear the cost of moving if they find out their fund isn’t so green after all.

“Without a comprehensive cost-benefit analysis, the regulator’s proposals are lop-sided. Further work on what the costs are going to be, who will pay, and how the regulator will enforce the rules is clearly necessary.”

Appointed by the House of Commons, the Treasury Sub-Committee takes the lead in scrutinising regulatory proposals which are open for consultation from the FCA, Bank of England, and PRA.

Further witnesses from the UK Sustainable Investment and Finance Association (UKSIF), the Investment Association (IA) and climate think tank E3G were questioned over and whether tighter regulations could drive funds away from the ESG space, and how the SDR proposals compare with other international regimes.

In response to Sustainable Investment’s request for comment, a spokesperson for FCA stated: “Consumers must be confident when products claim to be sustainable that they actually are. Clear labels will help consumers make an informed decision where to invest and regain trust in an evolving market.

“Our analysis strongly suggests that the benefits of consumers being able to invest in products which meet their preferences outweigh the costs.  

“We have set out our views on the costs and benefits. We received around 240 responses to our consultation – we welcome the committee’s engagement on this topic and we’ll consider all the feedback including theirs. When we publish the final rules, we’ll set out an updated views on the costs and benefits, including switching costs.”

This article first appeared at Sustainable Investment.