The Financial Conduct Authority’s (FCA) new anti-greenwashing rule (ESG 4.3.1 R) takes effect from 31 May 2024. Last week, (23 April) the FCA Issued its Finalised Guidance FG24.3 on the anti-greenwashing rule. The rule will have far reaching implications for the Financial Services sector and we are likely to see an increase in strategic environmental litigation as a result of these rules.
Scope
The anti-greenwashing rule (“the Rule”) applies in relation to financial products and services which FCA-authorised firms make available for clients in the UK including financial promotions that authorised firms communicate or approve for unauthorised persons (including for overseas products and services where the promotion is approved in the UK).
The Rule applies with respect to references to sustainability characteristics (environmental and/or social characteristics) of a product or service when a firm:
- communicates with clients in the UK in relation to a product or service, or
- communicates a financial promotion (or approves a financial promotion for communication) to a person in the UK.
Sustainability claims made about the firm itself (for example through corporate reporting) must be made in accordance with the guidance of The Competition and Markets Authority (“CMA”) as well as the Advertising Standards Authority (“ASA”). We have seen an increasingly active role by the ASA in issuing sanctions for misleading “green” claims. The CMA have recently sanctioned high street fashion retailers in respect of their sustainability claims, the first “greenwashing” decision by the CMA.
Four Key Principles
The anti-greenwashing guidance sets out four key principles that must be adhered to.
- Sustainability references should be correct and capable of being substantiated
Firms will need to ensure that sustainability claims are accurate and are capable of being substantiated by credible evidence. Importantly, the guidance recommends that that evidence is reviewed and updated throughout the lifespan of the product or service. This might be challenging for some products where technology and policy changes can be rapid.
The FCA also gives a clear example of the type of claim that might fall foul of the Rule. A claim that an investment is “fossil fuel free” but where the terms and conditions explain that the investment fund includes investments in companies involved in the production, selling, and distribution of fossil fuels where the company’s revenue earned from those activities is below a certain threshold would be regarded as a misleading claim. This underscores the need for firms to keep companies included within investments under review.
- Sustainability references should be clear and presented in a way that can be understood
Firms must consider whether the meaning of all the terms would be understood by the intended audience. The guidance recognises that the requirements of the information that is presented to consumers will be different to that presented to a professional client.
Firms should consider how images, logos and colours together may be perceived by the audience when presented alongside other sustainability characteristics of a product or service. Claims may be undermined if what they say is factually correct, but their visual presentation conveys a different impression. This is consistent with ASA decisions which have considered the images used in advertisements as well as any text or spoken claims.
- Sustainability references should be complete – they should not omit or hide important information
Firms should consider what information is necessary to include for the claim to give a representative picture of the product or service. In particular, the FCA cautions that firms should base their claims on the full life cycle of the product or service. Firms should not cherry‑pick information as this may give the impression that a product or service has sustainability characteristics that it does not have.
The FCA provides an example of a bond which is promoted as being used to finance a range of sustainability projects including renewable energy and improving companies’ energy efficiency. However, eligible activities also include projects to improve the efficiency of fossil fuel energy production and distribution – information which is not included in the promotional materials. This type of promotion would fall foul of the Rule.
- Comparisons should be fair and meaningful
Claims comparing the sustainability characteristics of products and services should make clear what is being compared, how a comparison is being made and should compare like with like. Claims that appear to make market‑wide comparisons but are based only on a limited sample have the potential to mislead their audience.
Any comparative claims need to be substantiated by evidence.
What are the implications for regulated firms?
The Rule is part of a wider regulatory landscape which wishes to clamp down on false and misleading environmental claims.
The FCA guidance places the onus of verifying environmental claims firmly at the feet of the regulated firm. This verification process might be a difficult task, particularly where investment products might span several companies operating in a number of countries or in a number of industry sectors where data might not be consistent or available in a readily comparable format. The obligation to verify is a continuing one and will require firms to closely monitor the activities of companies included within its investment products.
Climate-related litigation against financial institutions shows emerging trends, in particular in respect of claims of greenwashing and breaches of directors’ duties. We have seen an increase in environmental campaigners making complaints to the ASA and CMA in respect of greenwashing claims. It is anticipated the following adoption of the Rule that we will see an uptick in complaints to the FCA. Regulated firms need to ensure compliance with their obligations to manage the reputational and regulatory risks.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
