A regulatory priority
The number of financial products and services in the market that claim to have sustainability characteristics has been growing in recent years. This has given rise to a greater risk of misleading, exaggerated or unsubstantiated claims being made about the sustainability credentials of those products and services, or “greenwashing” as that practice has come to be known, the tackling of which has become a firm priority for the FCA.
The introduction by the FCA of its anti-greenwashing rule, as part of the package of measures being introduced through the FCA’s broader sustainability disclosures regime (or “SDR”), will be key in strengthening the FCA’s supervisory toolkit to tackle greenwashing. The rule is intended to help ensure that sustainability-related claims made by authorised firms about their products and services are fair, clear and not misleading, and are consistent with the actual sustainability characteristics of those products or services. Ahead of the anti-greenwashing rule coming into force on 31 May, the FCA has published its final Guidance intended to assist firms in meeting the required standard.
Scope and applicability
The anti-greenwashing rule, which applies to all FCA-authorised firms and is set out in the FCA’s ESG Sourcebook (in ESG 4.3.1R), states that firms should ‘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 rule will apply when a regulated firm:
- communicates with clients in the UK in relation to a product or service; and/or
- communicates a financial promotion (or approves a financial promotion) to a person in the UK.
It will apply with respect to references to sustainability characteristics (environmental and/or social features) of a product or service which FCA-authorised firms make available for clients in the UK (including financial promotions that authorised firms communicate or approve for unauthorised persons).
So as to not be unduly restrictive, the FCA has deliberately chosen not to provide a specific list of terms that would fall within the anti-greenwashing rule. Instead, it states that it will apply to “references to environmental and/or social characteristics of financial products or services” and has provided a limited number of illustrative examples to demonstrate what it considers compliant and deficient communications would look like. Whilst understandable that the examples cannot be exhaustive, this lack of specificity risks making compliance more difficult for firms who will need to make their own assessment of what does and does not fall within scope. The final guidance stresses that sustainability claims can comprise a broad variety of claims given that they can be present in “statements, assertions, strategies, targets, policies, information and images”.
Building on existing requirements
The principles behind the anti-greenwashing rule — those of transparency, clarity and not misleading consumers — will be familiar to firms, which are already subject to those types of requirements in other FCA regulations such as the FCA’s principles for businesses, the Consumer Duty, ‘guiding principles’ for fund managers, and consumer protection requirements from the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA).
However, the anti-greenwashing rule represents the first time that the FCA has focused specifically on sustainability claims made by all authorised firms and to comply with it, firms’ processes and capabilities may require significant uplift in terms of identifying, reviewing and verifying claimed credentials. No doubt firms will be reviewing and updating their marketing policies and guidelines and ensuring adequate training is in place before 31 [1].
Principles underpinning the anti-greenwashing rule
The four areas of focus in the guidance are:
1. Claims must be correct and capable of substantiation
- All claims should be factual. This principle could be violated by a firm overstating the sustainability characteristics of a product or service, or by a firm providing conflicting or contradictory information which does not give users a clear impression of the sustainability characteristics of a product.
- Robust, clear, relevant and credible evidence should be maintained to support the sustainability characteristics of a product. Firms should regularly review their claims against the evidence collected to ensure that the case for a claim is still correct. It is possible for a product to ‘lose’ the sustainability characteristics it once had, therefore regular compliance checks should be carried out.
- It may be appropriate in some cases to make evidence supporting sustainability claims public.
2. Claims must be clear and understandable
- Claims made should be transparent and straightforward. Firms should ensure that the intended audience will generally understand the language used. This may require technical terms to be explained, and broad/general terms which are vague or confusing should be avoided. Colours and imagery used in marketing or other materials can also be ambiguous or confusing and should not conflict with written representations on sustainability.
- Firms which are subject to the Consumer Duty should test communications where appropriate. These firms should also ensure that they understand and monitor consumer outcomes in line with other existing Consumer Duty requirements.
3. Complete and considering the full life cycle
- Claims should represent the whole product or service. Where caveats are applied to claims, these should be made clearly and prominently.
- Claims should be balanced (i.e. positive characteristics should not be made in a way which disguises or obfuscates negative impacts).
- Where a claim only refers to a part of a product’s life cycle, this should be detailed explicitly.
- Firms subject to CMA and ASA guidance, FCA Principles 6 and 7 or the Consumer Duty, must comply with the additional requirements under those regulations for claims that they make. This information forms part of a representative picture of a firm, and must therefore be fair, clear and not misleading.
4. Fair and meaningful comparisons
- Comparisons to previous iterations of the same service or product, or to other products (including those of competitors) should be fair and meaningful and allow the intended audience to make informed choices.
- When making comparison claims, firms should present enough information as to the nature of the underlying characteristic, how the comparison was made or determined and the ways in which the comparison is made on a like-for-like basis. Evidence substantiating claims should be comprehensive.
- When making claims about the extent to which a feature of a product or service has sustainability characteristics, firms must be aware that, if the product simply meets a minimum standard of compliance with existing legal requirements, this may give consumers a false impression that the product or service is superior to others.
Pallas can advise on the application and scope of the anti-greenwashing rule, the new SDR regime and, more broadly, are experienced on advising on all legal frameworks underpinning environmental claims and managing greenwashing risk. Please contact Tracey Dovaston and Rekha Rogers for further information
¹ Asset managers who are using sustainability related terms in their product naming and marketing do not need to comply with the new naming and marketing rules or produce the additional disclosures under the SDR and labelling regime until 2 December 2024
