Sustainability is back on the agenda of business and finance after the Covid-19 pandemic assigned it to the backburner for a few years, and the Financial Sector Conduct Authority (FSCA) is concerned about associated risks to consumers of financial products that need to be addressed.
Last week the FSCA published its Sustainable Finance Consumer Risk Report and Roadmap 2024, outlining the risks and its proposals to counter them.
Sustainable companies are those that prioritise long-term goals beneficial to the communities in which they operate over short-term profits for shareholders, taking into account their impact on the environment. Investors can assess a company’s sustainability efforts by how well it scores on ESG (environmental, social and governance) factors.
Younger generations of investors in particular are attracted to sustainable companies, and the financial services industry has responded by developing ESG-focused investment products, spawning a “sustainable finance” sub-sector.
The National Treasury defines sustainable finance as “financial models, services, products, markets and ethical practices that deliver resilience and long-term value in each economic, environmental and social aspect, contributing to sustainable development goals and climate resilience”.
Specific risks
In its report, the FSCA distinguishes between general risks to consumers across all financial products – to which regulations incorporating the Treating Customers Fairly principles have already been directed – and risks specific to sustainable finance.
It identifies two main areas of concern:
• Inconsistencies in measuring and reporting on ESG-related performance. “This hinders a reliable understanding and comparability of what constitutes a green, low-carbon, sustainable, or ESG product or investment strategy,” the FSCA says.
• Deceptive marketing strategies. Products are misleadingly presented as fitting sustainability criteria. These deceptive strategies are known as “greenwashing” (involving false or exaggerated claims about an investment’s environmental impact or a company’s sustainability efforts); “social washing” (when there is a gap between a company's stated commitment to social issues and its actions); and “impact washing” (falsely marketing investment products as having a significant impact on the real economy, where this impact is either unverifiable, immeasurable, or overstated).
The report says greenwashing and other deceptive marketing strategies can harm consumer interests and reduce overall consumer trust.
It quotes a 2023 report by the Organisation for Economic Co-operation and Development (OECD), which says regulators and policymakers globally are taking steps to improve market accountability.
“For instance, misleading advertisements have been removed, and greenwashing reviews of certain financial products have been conducted. These actions highlight the importance of clear labelling, defining sustainability terminology, and explaining how sustainability is integrated into investment strategies. Companies making false or misleading sustainability-related statements face enforcement actions, indicating increased scrutiny of greenwashing practices in the financial sector.”
Investment product proposals
The FSCA report outlines strategies the OECD recommends to protect consumers and improve their financial well-being. These include:
• Adopting a consistent approach to sustainable finance to facilitate consumer clarity and understanding;
• Regularly monitoring the market to identify risks and gaps in the regulatory framework;
• Considering the opportunities of sustainable finance to promote access and inclusion for excluded or under-served populations;
• Developing targeted financial education initiatives to promote awareness and understanding of sustainable finance products;
• Considering the adequacy of disclosure standards and supporting transparent sustainability reporting;
• Monitoring disclosure and advertising to understand how sustainable finance products are promoted, and watching for misleading representations;
• Harnessing complaints handling and redress mechanisms; and
• Encouraging the appropriate training of financial services providers and intermediaries about sustainable finance products and services.
Insurance and global warming
Rising risks to consumers related to climate change are also considered in the report. Research by the International Association of Insurance Supervisors points to a number of risks consumers face as a result of increasing natural catastrophes. These include:
• A low awareness of the risks to homes and properties, resulting in consumers not having sufficient cover;
• A low awareness of available cover options and limited awareness of pricing;
• A widespread belief that governments will intervene in the event of natural catastrophes;
• An inability to afford premium increases that come with the increased frequency and scale of natural catastrophes;
• A low awareness of the content, coverage and limitations or exclusions of existing insurance they have bought, resulting in a mismatch between what they believe is covered what is actually covered.
The FSCA says it is collaborating with industry to address contract certainty for exclusions that exacerbate protection gaps. In relation to policy issues around disaster risk financing. The FSCA says it and the Prudential Authority continue to support industry dialogue with the Treasury.
PERSONAL FINANCE