The FCA's Anti-Greenwashing Rule: a perilous tightrope for businesses

Key Takeaways

• The anti-greenwashing rule requires all authorised firms to make sure sustainability-related claims are “fair, clear and not misleading”. It comes into force on 31 May 2024 and we expect it to present a high hurdle to meet.
• A key element of the rule is that sustainability-related claims in communications must be complete and not omit or hide important information. Meeting this requirement will likely be the biggest challenge for firms.
• The introduction of the rule demonstrates the FCA’s focus on and commitment to tackling greenwashing. Early enforcement action against rule-breakers should be expected.
• The rule also expands the legal remedies available to “private persons” who suffer loss because of greenwashing. This is predicted to contribute to a rise in civil claims against authorised firms in the future.
• Organisations can protect themselves from the risk of greenwashing by incorporating and adopting good practices in governance, disclosure and due diligence, and by thoroughly understanding the sustainability elements of their offerings.

Introduction

On 28 November 2023, the FCA published its much anticipated Policy Statement (PS 23/16) on the UK Sustainability Disclosure Requirements (SDR) and investment labels. As part of SDR, the FCA confirmed that it was pressing ahead with the anti-greenwashing rule (AGR) which will come into force on 31 May 2024. Our client guide and quick reference guide on SDR is accessible here.

At the same time, the FCA published GC23/3, a consultation about the guidance which will accompany the AGR. The consultation closes on 26 January 2024. The guidance is to help firms understand what is expected of them to comply with the new rule, once it enters into force, when making claims about the sustainability of a product or service.

The Rule

The AGR requires FCA-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 rule applies to all communications about financial products or services which refer to the sustainability (ie environmental and/or social) characteristics of those products or services. It is therefore broader than the Consumer Duty, which is relevant to the firm-consumer relationship.

In summary, the FCA proposes that firms should take the following guidance into account when making sustainability claims. Sustainability references should be:

• Correct and capable of being substantiated: Claims firms make should be factually correct and capable of being substantiated by robust and credible evidence. The evidence should be regularly reviewed and consideration given to making it public. If a firm uses terms like climate, green, net zero, transition or responsible to market a product, it must make sure there is evidence to back up those claims.
• Clear and presented in a way that can be understood: Claims should be transparent and straightforward and technical language avoided or explained. Any visual presentation of the claim using images, logos or colours should align with the facts and not convey a different impression.
• Complete: Claims should convey a representative picture of the product or service. Firms should not omit or hide important information and conditions or caveats should be clearly and prominently stated. Claims should be presented in a balanced way and not focus solely on the positive sustainability characteristics, where other aspects may have a negative impact on sustainability. They should also consider the full lifecycle of the product or service.
• Fair and meaningful in relation to any comparisons to other products or services: Comparisons should enable the audience to make informed choices about the products or services. 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.

The proposed guidance is set out in GC23/3 and includes helpful examples of good and bad conduct in Annex 1.

The guidance is expected to be finalised in early 2024, after the consultation is completed, and come into force with the anti-greenwashing rule on 31 May 2024.

Our Comments

The AGR and the proposed guidance are consistent with the FCA's Principle 7 and with other rules and guidance in the FCA Handbook relating to financial promotions and advertisements, such as the Consumer Credit Sourcebook and the Conduct of Business Sourcebook. Therefore, whilst the AGR and guidance are new, the general principles of fair, clear and not misleading communications will already be familiar to financial services firms.

In our view, the AGR places a much greater onus on the total accuracy of firms' communications than ever before. In practice, the standard will be a high hurdle to meet. We expect that more technology-based supervisory and enforcement activity will be used to enforce the rule – and that the FCA will be looking to take landmark enforcement cases against early offenders.

A key new element within the AGR and guidance is that sustainability claims must be complete and not omit or hide important information. A key aspect of completeness is that any feature of a product or service which could have a negative impact on sustainability must be as prominent in the communication as positive sustainability characteristics. So, for example, a bank promoting “green bonds” which “help green the planet” should not omit reference, where true, to the fact that the bonds may be used to finance projects which aim to improve the energy efficiency of fossil fuel production and distribution. The whole picture must be provided so informed decisions can be made.

In terms of regulatory enforcement, the fact that an anti-greenwashing rule has been introduced is a clear warning that the FCA intends to step-up scrutiny of sustainability claims made by authorised firms in future.

The FCA has developed screening tools and AI processes to examine firms' financial promotions and we expect that they will use similar software to screen for anti-greenwashing compliance. Supervisory action in relation to the new rule could include asking firms to amend or withdraw marketing materials; asking firms to provide evidence which substantiate their claims; and/or checking that firms have appropriate systems and controls in place to ensure compliance with the rule. Targeted enforcement action against those who don't comply is considered likely once the rule enters into force.

In terms of civil claims, the establishment of the new rule will expand the legal remedies available to “private persons” (generally individuals and small partnerships) who have suffered loss because of unfair, unclear or misleading communications by an authorised firm in relation to the sustainability characteristics of a financial product or service. Such claims would be founded on s 138D of the Financial Services and Markets Act 2000 and focus on a breach of the AGR. In contrast, corporate entities which suffer loss will be left with the more conventional remedies under the Misrepresentation Act 1967 or the common law.

Previously the regulatory standard of fair, clear and not misleading was already, arguably, a higher standard than under the Misrepresentation Act, at common law or in equity. It is doubtful that unfairness alone would constitute a misrepresentation/negligent misstatement if a statement was nonetheless clear and not misleading. A half-truth can be an actionable misrepresentation. However, the new AGR likely widens the gulf between the standard expected of regulated firms and the standards otherwise imposed by law, at least in relation to sustainability claims. This, in turn, widens the gulf between the remedies available to private persons compared with corporates in respect of a breach of the AGR (because of the availability of section 138D for private persons).

The AGR seems to build on the direction of travel established by the Advertising Standards Agency (ASA). The ASA have upheld complaints where firms promote sustainable initiatives such as tree planting and transition financing but, at the same time, fail to disclose exposures to oil and gas lending and the associated carbon emissions.

We expect that the FCA will continue further down the path already trodden by the ASA. Accordingly, we expect that the AGR will be a perilous tightrope for firms to walk. On the one hand, consumers demand products, services, values and conduct which promote sustainability. As such, sustainability credentials have become a powerful marketing tool for industries from food to clothes and for products from investments to mortgages. However, there are few firms which have nothing whatsoever to hide on their sustainability journey. Accordingly, going forward, firms must consider whether every sustainability claim must be tempered with a counter-balancing 'admission'. And which admissions are the counter of which sustainability claims? And can small print be used; would that be fair and clear? Importantly the ASA focussed on sustainability images used as well as words, and we expect the FCA to follow suit.

Whilst we expect that completeness will be the biggest challenge for firms, the difficulties of capable of substantiation should not be underestimated either. Are assumptions or estimates permitted? What about scope 3 greenhouse gas emissions which are notoriously difficult to calculate? Do we have to divide up carbon reductions between offsets and emission reduction? One thing is clear: the cost and risk of making sustainability claims is about to significantly increase.

Practical Implications

Authorised firms should review the draft guidance and consider whether they wish to provide feedback on the FCA consultation. The closing date for responses is 26 January 2024.

Finalised guidance will be published in Spring 2024 will also require to be reviewed and implemented.

Given the short timeline proposed for commencement, firms should begin to implement and embed the rule across their business now.

All communications that refer to the sustainability characteristics of products and services should be assessed to ensure that they are fair, clear and not misleading, and supported by documented credible evidence.

The implementation exercise will also likely require firms to enhance their policies, procedures and controls including establishing clear guidelines on the use of sustainability terminology and the data and evidence which must be retained to support any sustainability statements made in external communications.

Crucially, employees will need to be trained on the new rule and any consequent changes made by firms to their internal procedures.

If you need assistance with understanding and implementing the anti-greenwashing rule, please reach out to the contacts below: