20th October 2019
“The customer is always right” – Harry Gordon Selfridge, 1909
Last week the UK’s Financial Conduct Authority (FCA) released a report  summarising 73 responses to a 2018 discussion document on the topic of climate change and green finance . The FCA is a financial regulator whose general remit includes the policing how financial products are marketed and recognises that it will need to actively participate in the creation of new green finance products, hence the current industry engagement.
The responses themselves are not surprising and are commensurate with many other exercises in industry engagement (see appendix for a summary of the feedback). What is more interesting and novel is the FCA’s approach to interaction between different players in the market, and how greenwashing and consumer expectation fits into the overall market.
Much of the online coverage of the FCA’s announcement has focused on the forced disclosure of climate related information by securities issuers (e.g. publicly listed companies), and how that will serve to prevent or reduce ‘greenwashing’ (see here for more info on greenwashing). This is a top down approach that is seen by many as the only way to force large companies to change tack with respect to the environment.
The playbook goes something like this: Force companies to disclose climate related information with respect to a set of rules > consumers invest in the greenest companies > all companies change their behavior and become more green > climate improves. By way of an example, this is a key aspect of the EU’s green taxonomy method, whereby the EU will decide what is green and not, thus forcing companies to be categorised as green or not.
But there is also a bottom up approach. One which lets the consumer have an opinion on what counts as green or not, and the FCA have recognised this in their report.
The figure below demonstrates this point neatly and frames the role of the FCA in facilitating interactions between security issuers, financial markets and consumers as being key to ensuring a well functioning green financial market.
Figure 1 from FS19-6 
The figure above highlights the bottom up approach (i.e. consumers > financial markets > issuers) as just as important as the top down approach (i.e. issuers > financial markets > consumers), and it is the interactions between these entities that are crucial. For example, paragraph 2.26 of the FCA’s feedback statement  states:
“If these interactions do not work well, this could cause harm to consumers, undermine market integrity and stability, or impair competition. This could potentially impact adversely the transition to a greener economy.”
These interactions that the FCA describes cover a range of different things. Paragraph 2.24 defines these interactions:
“These interactions may capture a variety of activities. For instance, they may entail the flow of information, funds, assets or products between issuers, financial markets and consumers.”
The FCA recognises that information flow is essential for a green investment market to exist and the quality of that information flow is important in mitigating greenwashing:
“If investors and end consumers do not receive the appropriate information and advice to understand whether a product they are offered is genuinely green or sustainable, there is a risk that they purchase unsuitable products. There may also be a risk of mis-selling, or ‘greenwashing’.” – Paragraph 2.27 
The other important point here is that greenwashing does not necessarily have to be defined from above, i.e. by a regulator or governing body. In a bottom up approach, consumers themselves have a say in what is green and what is not, which is then fed back to security issuers and financial services companies. The FCA refer to consumer expectation as being key to defining greenwashing. Essentially this turns greenwashing into a social construction, rather than a definition imposed by the regulator. If consumers believe a product has been mis-sold as green then it has been mis-sold as green, but in order for consumers to make that judgement they need to receive clear information.
Information flow is critical to the transition towards a greener economy. As companies are forced to disclose more and more environmental and climate related information this will create a large amount of new and unfamiliar data. Systems or institutions will be need to be created in order for consumers to quickly and clearly understand the complexities of climate related data, thereby enabling consumers to make the green investment decisions they desire. This is also our goal at Green Finance Guide, as we work on improving the communication of climate related data to enable this decision making.
The feedback was categorised into five separate themes :
- Climate-related disclosures by securities issuers (e.g. publicly listed companies)
- Climate-related disclosures by regulated firms (e.g. financial services companies)
- Common metrics and standards on sustainability
- Stakeholders’ concerns, commercial priorities and barriers to growth
- Industry engagement
Green Finance Guide
Green Finance Guide is a source of green financial, renewable energy and climate change news and insight