FCA warns of clampdown on ‘social washing’

The Financial Conduct Authority’s Sacha Sadan has warned the regulator has its eye on ‘social washing’ and that the issue is just as prevalent as greenwashing.

Speaking at an SRI Services & Partners event for Good Money Week on 6 October, Sadan said how asset managers tackle social issues “will be very important in the next few years”.

“Consumers and the electorate care about that a lot,” he added.

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As director of ESG at the FCA, Sadan made a point of saying he is director “of ‘E’, ‘S’ and ‘G'”.

“You hear about greenwashing but you do not hear about ‘social washing’, but it is just as bad and we will hear a lot more about it over the next few years,” he said.

Earlier this week, FCA technical specialist in sustainable finance and stewardship Mark Manning told Good Money Week delegates that the long-awaited Sustainability Disclosure Requirements and labelling proposals will “hopefully” be published “by the end of this month”.

Sadan reiterated why the industry needs these “guardrails”, calling out asset managers guilty of using hyperbole.

“If someone tells you that ‘ESG outperforms’ – that is one of the phrases I’ve heard over the years – I do not know what that means, and I have been in the industry for a very long time. Or ‘I integrate ESG into everything’ or the other example I have is ‘we cover all SDGs’ – excellent. Wow. Can you give me an example? So this industry does need guardrails.”

While corporations have a key part to play in tackling greenwashing, “they cannot do it alone if others do not raise the bar”, Sadan said, calling on asset managers, asset owners, ESG ratings providers, auditors and investment consultants to do their duty.

On the disclosure requirements, Sadan said there will be one set of metrics on each sustainability topic. “Hopefully it is a metric CFOs and asset managers have all agreed on before,” he said, adding that different countries should have comparable numbers. “That is the dream.”

“It is happening very quickly. I think by February next year we will have lots of things done. We are getting there,” he said.

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Meanwhile, there will be three sustainable labels under the new proposals, but Sadan raised the point that “not everyone wants ESG”.

“You cannot say you have integrated ESG everywhere. You have to say if you own oil and gas or companies with a gender pay gap, but say what you are doing to improve them.”

However, brevity is key, Sadan added, saying “consumers do not understand 76-page documents.”

“To help them give them the succinct version. It is not that hard to say what metrics you are judging on. And if it is not being judged on metrics do not say it is.”

He continued: “If there is something that is going to be surprising to consumers, explain why in a two-to-four-page document. If you explain, people will mostly be ok with it. It is much better than not telling them. Do not use words like stewardship or transition. They are nice words and our industry loves them. But instead use words such as ‘improve’.”

Sadan admitted the labelling guidance is “complicated” and that the FCA “will not get it perfect first time”.

“But do we need to do this? Absolutely. Consumers are crying out for some kind of standardisation.”

ESG ratings remain on the FCA’s agenda, Sadan confirmed. In July this year, the regulator admitted there is a rationale for regulating ratings providers. “In response to the discussion paper, everyone said they should be regulated. But we need to make sure they are internationally the same, as has been done with credit ratings,” he said.

Beth Brearley is editor at Sustainable Investment

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