The FCA’s anti-greenwashing rule and supporting guidance: what do firms need to do?

The FCA’s anti-greenwashing rule (the “Rule”) comes into force on 31 May 2024. This is a delayed date reflecting the drafting of, and consultation on, supplementary (non-Handbook) guidance on the Rule which was only confirmed in FG24/3 on 24 April (the “Guidance”). Somewhat confusingly, the Handbook timeline (ESG 4.3.1) states that the Rule came into force on 28 November 2023, but this is not correct.

The Rule is the first step, but also arguably the centrepiece, of the FCA’s Sustainability Disclosure Requirements (“SDR”) and investment labels regime which was confirmed in Policy Statement 23/16 published in November 2023. This is an important new body of regulation designed to improve the transparency of sustainable investment products and protect consumers from false claims made in relation to sustainability attributes.

Interestingly, the FCA places the Guidance firmly within the orbit of its expectations on the Consumer Duty. This requires firms to act in good faith towards their retail customers, supporting them in achieving their financial objectives - in so much as they must give retail customers the information they need, at the right time and presented in a way that they can understand, enabling them to make informed decisions. These are clearly relevant to any claims regarding sustainability.

Who is caught?

The Rule is deliberately all-encompassing in scope, applicable to any FCA-regulated firm whether or not they consciously provide or promote products or services with a sustainability or ESG theme.

The anti-greenwashing rule

The Rule requires that any firm communicating with a client in the UK in relation to a product or service, or communicating or approving a financial promotion, must ensure that any reference to the sustainability of a product or service is consistent with its characteristics and is fair, clear and not misleading.

What is the supporting Guidance?

Arguably, there is nothing new in either the Rule or Guidance beyond what is already contained in the “fair, clear and not misleading” injunction in COBS 4.2. However, the intention behind both the Rule and Guidance is to tease out the nuances of this high-level principle.

There are four main elements to the FCA’s Guidance and these are supported by examples of claims that fail to meet their expectations, as well as examples of good practice. A selection of these is shown below:

1. Claims should be correct and capable of being substantiated: claims must be factually correct, not stating or implying features that are not true. They must not exaggerate the positive social or environment impact of the product. Impressions of sustainability must be supported by hard evidence. Claims can also be incorrect if they contain contradictory information.

Example: a promotional statement claims that a fund is “fossil fuel free” whereas the terms and conditions explain that it may include investments where revenues derived from this are below a certain threshold. The statement is thus incorrect, not capable of being substantiated and the claim thus misleading.

Good practice: A fund advertisement makes social sustainability claims, including statements that it invests in companies that have good labour practices in line with international best practice. The fund manager has established clear and robust standards for selecting investee companies – including fair wages, safe working conditions and other criteria aligned with international frameworks – and assesses and monitors the investments selected. Its objectives including standards for selecting investee companies and the of holdings in the fund are clearly explained in marketing materials.

2. Claims should be clear and presented in a way that can be understood: claims must be transparent with the meaning of terms generally understood by the target audience. Technical language should be either avoided or carefully explained. Vague, broad terms giving an impression of sustainability should also be avoided, as should the use of images, logos and colours. Firms subject to the Consumer Duty must specifically test that their communications are appropriate.

Example: a firm places an image of a rainforest on its webpage about its savings account with an overlay of “Sustainable savings”. The webpage includes a “Green Savings Account” which lends to companies to support sustainable projects, alongside other savings accounts which have no such attributes. The presentation is thus misleading in giving the false impression that it invests in sustainable projects across the board.

3. Claims should be complete – they should not omit or hide important information: claims must convey a representative picture of the product or service. Where claims are true only if certain conditions or caveats apply, this must be clearly and prominently explained. Claims must be presented in a balanced way, not highlighting positive sustainability impacts, or disguising or playing down negative ones.

Example: a bank promotes “Green bonds – greening the planet” – which it uses to finance sustainability projects including renewable energy and improving the energy efficiency of companies. Some of the latter include projects within fossil fuel production and distribution – which is not disclosed in the promotional materials. This omission is potentially misleading and does not give the complete information for investors to make an informed decision.

4. Comparisons should be fair and meaningful: comparisons with competitors’ products, or with previous versions of the same product, must allow the audience to make informed choices. Claims must make clear what is being compared and must compare like with like. Making a claim of sustainability characteristics on products which only meet a minimum standard of compliance with legal requirements may also be misleading.

Example: an insurer offers “The UK’s Greenest Car Insurance”, suggesting that it has the most positive environmental impact of all such products. However, there is no supporting information to explain how the conclusion was reached and the comparisons made with equivalent products. Such claims must be backed by evidence.

Practical advice to ensure compliance with the anti-greenwashing rule:

• Revise compliance policies and procedures to reflect the Rule and supporting Guidance;
• Review existing marketing materials and other communication proformas in the light of the Rule; and
• Incorporate the FCA’s supporting guidance into the review process for financial promotions and other communications with existing and prospective clients and investors.

What comes next?

The anti-greenwashing rule is closely followed by the phased introduction of SDR and investment labels as below:

• 31 July 2024: firms may use the new sustainability labels with accompanying disclosures.
• 2 December 2024: product naming and marketing rules come into force with accompanying disclosures.
• 2 December 2025: ongoing product-level and entity-level disclosure requirements for firms with AUM greater than £50bn, come into force.
• 2 December 2026: entity-level disclosure requirements extended to firms with AUM greater than £5bn.

Extending SDR to portfolio management

The final Guidance was accompanied by the FCA launching a separate Consultation CP24/8 on Extending the SDR regime to portfolio management. Portfolio management in this context is defined as “a service provided to a client which comprises either:

• Managing investments; or
• Private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is investment in unlisted securities."

However, sifting through the detail of the Consultation, the proposals are significantly narrower in scope than had been anticipated by the industry. The FCA emphasises that SDR (and its extension to portfolio management) is aimed primarily at protecting retail investors. Hence, the main focus will be on retail model portfolios, customised portfolios and/or bespoke portfolio management services (tailored to the clients’ needs and preferences).

Specifically excluded (and highly relevant to wholesale investment managers) are:

• Services where the clients are based overseas (i.e. those that either normally reside outside of the UK or have their head or registered office outside of the UK); and
• Portfolio management provided to a client that is a fund, or an alternative investment fund manager or management company for, or on behalf of, a fund (i.e. where the portfolio manager acts as a delegate).

The new Consultation closes on 14 June 2024. The FCA proposes to phase in the requirements for portfolio management starting with the labelling regime and naming and marketing rules on 2 December 2024.

Cosegic comment:

In addition to preparing for the anti-greenwashing Rule, firms should be reviewing their investment and marketing strategies for potential touch points with the new sustainability disclosure regime, including those that apply to certain types of portfolio management, as outlined above.

We will be supporting our clients in the implementation of SDR, including amendments to compliance documentation. See here for our most recent Capital Markets newsletter which contains a summary of the regime.