UK financial regulator probed on green wash victims compensation

UK financial regulator probed on greenwash victims compensation

A group of MPs is requesting that consumers be included in the process as the Financial Conduct Authority (FCA) develops new regulations to prevent investment products from engaging in “greenwash.”
A group of MPs is requesting that consumers be included in the process as the Financial Conduct Authority (FCA) develops new regulations to prevent investment products from engaging in “greenwash.”

UK financial regulator probed on greenwash victims compensation
FILE PHOTO: Signage for the Financial Conduct Authority (FCA), the Britain’s financial regulatory body, is seen at their head offices in London, Britain March 10, 2022. REUTERS/Toby Melville

The Financial Conduct Authority intends to establish standards that a UK investment fund must meet in order to be considered “sustainable,” “ESG,” “green,” or something similar.
The Treasury Committee says that the regulator didn’t think about what would happen to customers who were misled and are losing money because of it.
Who should pay and how regulations will be enforced may influence investment providers’ behavior.
The Financial Conduct Authority has been asked by the UK Treasury Committee to explain whether investors who are the victims of greenwash will have to pay to move their investments to funds that are properly labeled as “sustainable.”

The Financial conduct Authority is planning new regulations

In order for a UK investment fund to claim to be “sustainable,” “ESG,” “green,” or similar, it would need to meet certain criteria. As part of a larger strategy to build trust and integrity in ESG-labelled instruments, products, and the supporting ecosystem, the watchdog proposed a series of measures in October 2022 with the goal of protecting consumers and enhancing trust in sustainable investment products.

The information that some “sustainable” investments had invested in Shell, a major oil and gas company, prompted the decision (LON: SHEL) as well as ExxonMobil XOM), which led to greenwashing allegations. In point of fact, an ESG Book study conducted in October 2022 revealed that 95 climate funds did not fully align with the objectives of the Paris Agreement, indicating just how murky the ESG investing waters are.

The dangers to the customers

The Depository Sub-Board of trustees on Monetary Administrations Guidelines, which examines administrative proposition, cautioned that customers who at present put resources into reserves at legitimate fault for greenwashing may need to pay to move their interests into new ‘feasible’ reserves.

In point of fact, the Financial Conduct Authority’s analysis did not take into account any additional costs that the consumer might incur as a result of having to reevaluate which products they want to invest in and which ones they want to sell. Also, it didn’t take into account the cost to the customer of having to pay for the transaction costs of buying new ESG investments and selling investments they were told no longer met their needs.

The Committee stated that the cost-benefit analysis made “no attempt” to evaluate the costs that consumers incur when their investments are reallocated to different funds. The prices at which they sell the funds will be lower, and the prices at which they buy new investments will be higher.

Additionally, “no attempt” was made to price the possibility that the proposed new disclosures would alter the fund’s fundamental prices. When a fund is no longer able to advertise itself as “sustainable,” investors who have instructed their asset managers to only invest their money in “sustainable” funds may simultaneously pull out in large numbers.

As funds either rebalance or, depending on the nature of the fund, are forced to meet withdrawals in the event of large-scale sell-offs, the underlying values of these funds’ assets may also be impaired. In a sellers’ market, consumers who sell their existing investments will receive lower returns, which will harm consumers.

Who will bear the cost?

A more in-depth cost-benefit analysis of the regulator’s proposals was requested by the cross-party Committee of MPs. It inquired about the FCA’s enforcement efforts to combat funds that have deceived customers and whether there was a possibility that stricter regulations would drive funds away from ESG investing or out of the UK, thereby reducing consumer choice.

According to Harriett Baldwin MP, chair of the Treasury Committee, “Consumers who invested in funds believing they were doing their bit to save the planet should not be made to bear the cost of moving if they find out their fund isn’t so green after all.” Without an exhaustive money saving advantage investigation, the controller’s recommendations are hack sided. It is evident that additional research is required to determine the costs, who will pay, and how the regulator will enforce the rules.

The question of which party will bear the financial consequences of greenwash remains: should it be the investment platform, the fund manager, or both? The cost of greenwashing will skyrocket if consumer compensation is included in the upcoming regulation. As the MPs fear, this will force financial institutions to tighten up their oversight or eliminate ESG offerings altogether.

“The Financial Conduct Authority is ahead of many other financial agencies worldwide because it has publicly pledged to combat greenwashing through new asset manager regulations. Although it may be difficult to calculate damages (aside from additional transaction fees), “redress is a simple tool that could be used more universally, even in the absence of more robust regulations and enforcement regimes,” Josh Gregory, founder and chief executive of investment app Sugi, said.

“Instances of greenwashing ought to drastically decrease if the FCA’s new system for combating the practice works as intended, including through clear labeling that keeps the consumer’s interests front and center. However, there is no perfect system, and the FCA still requires a robust enforcement mechanism to deal with instances in which asset managers have been dishonest.

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