On 28 November 2023, alongside a policy statement on Sustainability Disclosure Requirements (SDR) and investment labels, the FCA published consultation paper GC23/3 on its proposed guidance on the Anti-Greenwashing Rule (the Rule).
We take a look at the consultation paper here. As a reminder, the Rule will operate in addition to the new sustainable investment labels regime and naming and marketing rules the FCA is introducing (see our analysis of these developments here).
The proposed anti-greenwashing guidance is intended to help FCA-authorised firms, who make claims about the sustainability of their products or services, better understand the expectations of them under the Rule, which states that a firm must ensure that any reference to the sustainability characteristics of a product or service is (a) consistent with the sustainability characteristics of the product or service and (b) fair, clear and not misleading (ESG 4.3.1R).
Scope
The Rule will apply to all communications that mention sustainability-linked characteristics of products or services made by FCA-authorised firms. It applies to firms that approve financial promotions for unauthorised persons for communication in the UK, and applies irrespective of whether such firms are subject to the Consumer Duty.
Four key principles
The FCA’s guidance proposes four key principles for sustainability-related claims and references:
1. Claims should be correct and capable of being substantiated
Firms must ensure the factual accuracy of their claims, without overstating or exaggerating the sustainability impact of a product or service. These claims should also be supported by credible evidence at the time they are made, and consideration should be given to making the evidence accessible to the public.
For example, if a firm makes a statement that an investment fund is “fossil fuel free”, it would be inconsistent with the Rule if that fund’s terms and conditions highlighted that it did invest in companies involved in the production, sale, and distribution of fossil fuels, but those investments fell below a de minimis threshold.
The FCA also expects regular reviews of claims to be made, and that approvers of financial promotions should actively monitor compliance with the financial promotions rules that apply over the lifespan of the promotion.
2. Claims should be clear and presented in a way that can be understood
Firms should use terms that are easily understandable by the intended audience and, unless their meaning is clear, they should explain any technical terms used. Firms must also ensure that their use of sustainability-related visuals (including images, colours and logos) do not mislead or improperly convey the factual information being stated.
As an example, it may be misleading if a firm uses an image of a rainforest and a generic heading like “sustainable savings” on a webpage to advertise a range of savings products if, in fact, only one of the products has sustainability characteristics.
3. Claims should be complete – they should not omit or hide important information
Information which may influence decision-making should not be omitted or disguised. It must be clearly stated if any claims are based on conditions or caveats, and any limitations in the information or data used should be disclosed. Claims should be presented in a balanced manner and should not seek to highlight only the positive impacts while concealing the negative ones. Firms should also be transparent about the specific stage of the lifecycle of the particular product or service to which a claim relates. Under this heading, the FCA gives the example that it would be inappropriate to market a fund which promotes energy efficiency in fossil fuel production under a promotion reading “Green bonds – greening the planet”.
The FCA also here cites the importance of explaining ESG ratings, in particular whether they relate to the assessment of ESG-related risks or sustainability impacts.
4. Comparisons should be fair and meaningful
The FCA emphasises that any comparisons made either to a previous version of a firm’s product or service, or to a competitor’s product or service, must be fair and clearly state which sustainability characteristics are being compared. Any comparative claims must be capable of being substantiated with evidence. Claims about the sustainability of products or services which merely meet their respective minimum legal requirements for sustainability should not be overstated and should avoid misleading the audience about the product’s superiority in the market.
For example, if a firm claims that by purchasing a particular investment product a consumer will “reduce emissions”, the firm should be clear whether that is a reference to Scope 1, Scope 2 or Scope 3 emissions – terms which the FCA highlights are technical in nature and not widely understood by consumers.
When does the guidance come into force?
The FCA intends for the finalised guidance to come into force on 31 May 2024, at the same time as the Rule. 26 January 2024 is the deadline set for providing feedback on the FCA’s guidance.
Analysis
As the FCA notes, the FCA Handbook already requires most firms to make sure that the information they communicate is clear, fair and not misleading. Firms should also consider the Consumer Duty where applicable and act in good faith towards customers. The FCA’s guidance reinforces the importance of clear and accurate communications with customers, whilst also providing a helpful clarification of the approach the FCA expects firms to take.
It is widely recognised that consumers find sustainability claims and ESG ratings difficult and potentially confusing to understand. The FCA’s expectation that firms will provide clear, complete and fair information on both will therefore be helpful to consumers. In particular, we think the expectation that firms will explain what ESG ratings are actually rating (i.e. real-world impacts or an assessment of ESG risks) is a sensible one. While the guidance helps to clarify the FCA’s expectations, by raising the bar it may also increase the pressure on firms to ensure that their claims and references do not fall foul of the new rule.
