Clear and consistent: the FCA finalises anti-greenwashing rule

September 2024  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

September 2024 Issue

Greenwashing – the act of making false or misleading statements about the environmental benefits of a product or practice – is a relatively new phenomenon, but instances are rising. According to RepRisk, greenwashing by banks and financial services companies around the world rose 70 percent in 2023.

There were 148 recorded cases from the global banking and financial services industry in the 12 months to the end of September 2023, up from 86 during the previous 12 months. European financial institutions accounted for most cases, with the majority of claims in question relating to fossil fuels.

Greenwashing erases trust by misleading individuals – such as consumers and investors – into believing they are supporting environmentally friendly companies and products when in fact they are not. Given the scale of the problem, it is no surprise that many jurisdictions are taking action to stamp out the practice.

On 23 April 2024, the UK Financial Conduct Authority (FCA) published final guidance (FG23/4) on its new anti-greenwashing rule, which came into force on 31 May 2024. The rule requires all authorised firms to ensure that any reference they make to the sustainability characteristics of their financial products and services are consistent with the sustainability characteristics of the product or service and are fair, clear and not misleading.

The anti-greenwashing rule has been designed to foster the industry’s long-term development and competitive edge by aligning business offerings with consumer expectations and enhancing the transparency of financial products centred on sustainability. Under the new regulation, sustainability claims made about products and services should be truthful and accurate.

According to the guidance, claims made by firms should be: (i) factually accurate and able to be supported by robust, relevant and credible evidence that is reviewed regularly; (ii) transparent and straightforward, with the meaning of all terms generally understood by the intended audience; (iii) fair and meaningful whether in relation to a previous version of the same product or service or to a competitor’s product or service; and (iv) complete – considering the full lifecycle of the product or service and not omitting or hiding important information that might influence decision making. This extends to not highlighting only positive sustainability impacts where this disguises negative impacts.

The final guidance also provides some important clarifications on the 2023 consultation proposals. In terms of scope, the anti-greenwashing rule will only apply to communications making sustainability-related claims to users in the UK, as well as financial promotions approved for communication to persons in the UK.

Furthermore, firm-level disclosures and the claims firms make about themselves are outside the scope of the rule. However, these disclosures and claims add to the overall picture of a firm. As a result, they should be considered when assessing how users are likely to understand sustainability-related claims.

Firm-level disclosures and claims remain subject to other expectations and rules, including guidance from the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA), the FCA’s Consumer Duty and FCA Principles 6 and 7. No rules from the FCA Handbook or other sources are overridden.

With respect to application, the rule applies to the visual presentation of communications and sustainability-related claims. It does not, however, apply to communications and claims which are not intended to refer to or describe the sustainability-related characteristics of a product or service.

The FCA also suggests that firms should consider making public the evidence to support their in-scope claims, though this is not mandatory.

Finally, from an asset manager’s perspective, the FCA confirmed that asset managers were required to comply with the anti-greenwashing rule by 31 May and subsequently with the Sustainability Disclosure Requirements’ naming, marketing and disclosure rules by 2 December 2024.

“Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment,” said Sacha Sadan, director of environmental, social and governance at the FCA. “Our good and poor practice anti-greenwashing examples will help firms market their products in the right way.

“We continue to work closely with the ASA and CMA to address greenwashing,” she continued. “Consumers care about investing in products that have a positive impact on the planet and people. That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money.”

Being proactive is the key to tackling greenwashing. In the UK, the FCA and other organisations are taking steps such as investigating companies that may be engaging in greenwashing practices.

Regulations such as the FCA’s new rules raise awareness of greenwashing and hold businesses to account. While the new framework largely serves to confirm pre-existing requirements, the guidance is broad and may require organisations to alter processes they already have in place.

Concerns related to environmental, social and governance issues are likely to intensify. As such, companies must give sufficient consideration to their communications, procedures and policies, and ensure they have adequate controls in place. They must be able to meet the additional regulatory expectations arising from new rules, and not treat them as an afterthought.

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Richard Summerfield