UK Financial Conduct Authority Adopts New Anti-Greenwashing Rule and Guidance

The UK Financial Conduct Authority (FCA) recently adopted a new anti-greenwashing rule, alongside supplemental guidance, requiring that financial service businesses regulated by the FCA ensure that any sustainability claims about their products or services are fair, clear, and not misleading.

In developing the new anti-greenwashing rule (New Rule) and guidance, effective 31 May 2024, the FCA considered the regulatory principles in the Financial Services and Markets Act 2023, including that the FCA shall contribute toward achieving the United Kingdom’s net-zero emissions target. The New Rule is contained in the Environmental, Social, and Governance Sourcebook of the FCA Handbook (ESG 4.3.1R).

The guidance stresses that tackling greenwashing is a priority for the FCA, noting the significant level of consumer interest in sustainable products and services by citing its own Financial Lives Survey (2022), which showed that 74% of adults surveyed agreed that environmental issues are important to them and 79% agreed that businesses have a wider social responsibility than “simply making a profit.”

In the guidance, the FCA highlights that as the demand for sustainable products and services grows, so does the risk of “greenwashing.” The FCA states that if stakeholders trust the sustainability-related claims firms make about their products and services, this may increase confidence in markets and the flow of capital into those products and services.

According to the FCA, it introduced the New Rule to:

• clarify for firms that they must ensure that any reference to the sustainability characteristics of a product or service is (a) consistent with the sustainability characteristics of a product or service; and (b) fair, clear and not misleading.” [1]
• have in place an explicit rule with which to challenge firms that the FCA believes to be making misleading sustainability-related claims about their products or services and if appropriate take further action.

NEW RULE

The New Rule applies when a firm:

• communicates with clients in the UK relative to a product or service that it provides, including when such communications are not financial promotions (e.g., periodic reports or quarterly newsletters);
• communicates a financial promotion to a person in the UK; or
• approves a financial promotion for communication by a third party to a person in the UK.

This includes financial promotions that firms communicate or approve for unauthorised persons (including for non-UK products and services). The guidance confirms that references to sustainability characteristics could be present in (but are not limited to) statements, assertions, strategies, targets, policies, information, and images relating to a product or service, whether retail or professional client facing.

Firms have been trying to determine if it is prudent to apply the New Rule to statements that they make about themselves that include references to sustainability characteristics of the firm or its overall business. The position of the FCA is that the scope of the rule concerns products and services but that other regulatory requirements can apply to sustainability-related claims that a firm makes about itself.

However, the guidance states that firms should consider whether information about themselves might be considered part of the “representative picture” of a product or service. It is not clear when the FCA will consider such information to be part of the “representative picture.” The FCA signposts Principles 6 and 7 (or, as relevant, the consumer duty), the Competition and Market Authority’s (CMA) guidance on environmental claims and the requirements of the Advertising Standards Authority’s (ASA) guidance as applicable to sustainability-related claims that the firm makes about itself.

The FCA makes clear that the New Rule is not a substitute for and is not intended to override any other related rules but rather is intended to complement and be consistent with those rules. For example, for communications that are intended to be received by retail customers, firms must ensure that they comply with the consumer understanding outcome, which is part of the FCA’s consumer duty. Firms are also subject to other legislation and guidance, including consumer protection laws. The FCA confirms that the New Rule and guidance are consistent with the guidance of CMA and ASA.

GUIDANCE

The guidance sets out a high-level checklist to support firms in how they present their sustainability claims. Ultimately, sustainability claims 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 information and should consider the full life cycle of the product or service.

In addition, comparisons to other products or services should be fair and meaningful.

Firms must be careful to ensure that their claims are factually correct and that they do not exaggerate the extent to which their products or services are environmentally sustainable and/or have a positive environmental/social impact. Ultimately, firms’ services and products should do what they say, and all claims should be supported with robust and credible evidence.

The guidance also states that that where firms rely on third parties for information, they should consider the appropriateness of relying on data, research, analytical resources, and other information provided by third parties to substantiate the claims they are making. Therefore, it is important that if firms are relying on third-party information that they have conducted appropriate due diligence on any third party partner/provider, and are comfortable with those credentials before relying on any information from the third party in the context of their sustainability communications.

The guidance provides some examples of the FCA’s expectations, including their key concerns, and provides indications on the types of communications that would drive them toward enforcement action. While the examples are not exhaustive, they have been designed to help firms understand what the core principles of the guidance mean in practice. Two examples are highlighted below:

• Bad practice: “A firm makes a promotional statement that an investment fund is ‘fossil fuel free’. However, 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.” This claim would be considered misleading because it is not factually correct and not capable of being substantiated.
• Good practice: “A firm advertises a fund which 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 establishes clear and robust standards for selecting investee companies – it has chosen to include fair wages, safe working conditions and other criteria that align with international frameworks and standards. It assesses and monitors the investments that it has selected, and seeks to address any issues that arise while holding the investment through appropriate escalation. Its marketing materials include a clear explanation of the investment objectives and strategy, including its standards for selecting investee companies and the types of holdings in the fund.”

The takeaway for firms is to get the facts right and not to make claims that are incapable of being substantiated and that the guidance not only facilitates enforcement action by the FCA but also creates greenwashing litigation risk for firms.

Following a back and forth between nonprofit ClientEarth and the FCA, ClientEarth released a press release on 20 June 2024 stating that the FCA recently disclosed to ClientEarth that it has one active environment-related enforcement case that began in July 2023.

NEXT STEPS

A firm’s legal, compliance, and/or regulatory team should carefully review the guidance to understand the FCA’s expectations around the New Rule, including the examples provided on the types of communications that exemplify “good practice” regarding how firms present and communicate the sustainability characteristics of their products and services to the market.

Firms should:

• sort existing materials between those covered and not covered by the New Rule and then review them against the requirements and guidance cross-referencing the messaging behind each product or service with regards to its sustainability characteristics alongside the guidance to ensure that current communication campaigns are meeting the New Rule and guidance;
• roll out appropriate internal training;
• enhance due diligence on external data providers;
• update compliance materials;
• ensure ongoing review of covered materials; and
• report on progress and challenges to their boards.

A well-prepared firm will appreciate the level of seriousness that the FCA has taken towards greenwashing and take active steps to ensure it complies with the guidance in promoting its sustainable products and services. A firm that has taken the time to assess its greenwashing risk appetite, socialised the FCA’s guidance with key stakeholders, and has appropriate risk management strategies in place to ensure conformity with the New Rule and guidance will be less likely to come under regulatory scrutiny or face enforcement action for greenwashing.

The FCA is likely going to take a proactive approach to enforcement of the New Rule, particularly given the prime place that greenwashing has occupied on the FCA’s agenda in recent years. The ASA has been increasingly active in policing greenwashing and, while decisions in respect of financial services companies are not extensive, there are relevant and important lessons from wider cross-sectoral decisions that give context and meaning to some of the guidance. Now that the FCA has a specific rule to hold firms to account, it is only a matter of time before we see the FCA build on the enforcement case disclosed by ClientEarth.

As explored in our previous LawFlash, other UK regulators, including the CMA and ASA, have already commenced investigations followed by enforcement action against companies in the fashion and aviation sector, respectively, for making misleading environmental claims.