Every firm authorised by the Financial Conduct Authority (FCA) has until the end of May to comply with the new anti-greenwashing rule. As that deadline is fast approaching, the regulator has released guidance to help firms meet the standard.
In this blog, we give an overview of the anti-greenwashing rule and the FCA’s latest guidance, and offer advice to help UK financial services firms stay ahead of these developments.
Why is the FCA bringing in this rule?
Firms exaggerating claims about the sustainability of their products and services (known as “greenwashing”) has been well-documented in the financial services industry for several years, and this new rule reflects the regulator’s expectations that all companies must tackle this problem.
The rule is designed to protect consumers by ensuring sustainable products and services are accurately described. The FCA explained: “We introduced the anti‑greenwashing rule to clarify to firms that sustainability‑related claims about their products and services must be fair, clear and not misleading. It gives us an explicit rule on which to challenge firms if we consider they are making misleading sustainability‑related claims about their products or services and, if appropriate, take further action.”
This is particularly important because there is substantial consumer interest in sustainable finance. The most recent FCA Financial Lives survey found that 81% of a random sample of the general public surveyed wanted their investments to do some good as well as provide a financial return. This trend is expected to continue, with Bloomberg Intelligence recently estimating that ESG assets-under-management will reach $40 trillion globally by 2030.
The FCA’s new rule therefore aims to support the long-term growth and competitiveness of the financial sector by helping businesses meet the demand and ensuring consumers who invest in sustainability-related financial products can make informed decisions.
When does the rule apply?
The FCA has emphasised that the new rule applies to all FCA-authorised firms without exception. The rule covers financial products and services which these authorised firms make available for clients in the UK. This includes 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).
Firms therefore need to comply with the rule when they:
- communicate with clients in the UK in relation to a product or service.
- communicate a financial promotion (or approve a financial promotion for communication) to a person in the UK.
The rule applies with respect to references to sustainability characteristics (environmental and/or social characteristics) of a product or service. These references could be present in, but are not limited to, communications that include statements, assertions, strategies, targets, policies, information, and images relating to a product or service.
The rule applies to all authorised firms irrespective of whether they are subject to the regulator’s Consumer Duty, which requires certain financial firms to put the interests of the consumer at the heart of their activities. Firms subject to the Duty should also consider their existing obligations under the Duty.
How should firms make references to sustainability?
Growing numbers of firms want to develop and promote products and services that they consider to be sustainable, and the rule specifies how they should make references to sustainability as part of their offering. Namely, references should be:
- Correct and capable of being substantiated.
- Clear and presented in a way that can be understood.
- Complete – they should not omit or hide important information and should consider the full life cycle of the product or service.
- If comparisons to other products or services are being made, they should be fair and meaningful.
So what should authorised firms do to meet the new standard? There are seven priority actions for firms to focus on:
- Review all their material and images related to ESG sustainability and responsible investing – both from a wording perspective and from an image perspective. Any images used around sustainability should be directly linked to the product or service being offered.
- Be able to demonstrate robust checks for inadvertent greenwashing, and put in place relevant controls to support this process.
- Focus on consistency with sustainability characteristics and ensure any statements made can be substantiated.
- Check and update marketing materials to ensure they are fair, clear, and not misleading, especially in relation to sustainability and ESG.
- Avoid confusion by not using different words to describe the same thing.
- Undertake any relevant training needed, and determine levels of expertise needed across the firm.
- Read the FCA’s FG24/3 finalised guidance and ensure relevant internal parties are aware of its requirements. The FCA’s has many examples of good and poor practice in the guidance, which firms can look to model (or avoid!)
What is next for sustainability disclosure requirements?
The new rule is far from the end of the regulator’s focus on sustainability claims and disclosures. The FCA is now consulting on extending to portfolio managers the requirements on how sustainable investments are labelled and explained in order to make consumer choice easier. This will apply to firms that manage a group of investments for consumers, which can either be offered as standardised products or tailored services.
The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023. They include:
- product labels to help consumers understand what their money is being used for.
- naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.
Watch this space for expert analysis of future developments in UK financial firms’ sustainability requirements, or contact us to discuss how fscom can support your compliance with this emerging regulatory framework.
By Ross Revell, Director at FMConsult, part of the fscom Group