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The FCA’s anti-greenwashing guidelines come into effect next week. What can we expect?

The Financial Conduct Authority’s (FCA) new anti-greenwashing guidelines come into effect next week, meaning ESG is firmly on the regulator’s radar and action should be happening on-the-ground.

The guidelines apply to all sustainability-related claims about products and services, and sit within the regulator’s Sustainability Disclosure Requirements (SDRs), a wider package of new guidance to help consumers better navigate the sustainability market.

The SDRs include guidance and rules that relate to investment labels and disclosures, naming and marketing rules that apply to UK asset managers, together with targeted rules that apply to distributors of investment products to retail investors in the UK.

Unlike parts of the FCA’s wider SDR regime, the anti-greenwashing rules apply to all FCA-authorised firms making sustainability-related claims about their products and services, not just investment products or asset managers.

What are the anti-greenwashing rules?

The rules aims to help ensure that sustainability-related claims made by banks and other firms about their products and services are fair, clear and not misleading, and are consistent with the sustainability characteristics of the product or service.

The regulator’s final guidance on the anti-greenwashing rule will come into effect on Friday, May 31, 2024. This comes after a consultation on the draft guidance that was published in November 2023, with the aim of clarifying the rules for companies.

The FCA aims to build “transparency and trust” by introducing labels to help consumers navigate the sustainable investment product market, in particular by ensuring that names reflect the sustainability profiles of product. If an investment is branded as ‘sustainable’ or having ‘ESG’ credentials, it needs to!

What can companies expect?

CityAM spoke to leading lawyers to understand what companies can expect from this and what the consequences will be if they make a mistake.

Martin Cook, partner at law firm Burges Salmon explained that claims on products will need to be consistent with the sustainability features of the product or service. They’ll need to be fair, clear and not misleading. He outlined that “the rule will apply to a wide range of communication tools and aims to create a level playing field for companies offering truly sustainable choices for their customers.”

“The rule is intended to complement and remain consistent with existing requirements for firms, but highlights the FCA’s focus on tackling greenwashing in the sector and positions sustainability as a priority area for FCA recognised firms to focus on.”

Lucy Blake, partner at law firm Jenner & Block, pointed out that these new rules coming into effect should in principle be nothing new for regulated companies. She noted that firms should already strive to make fair, clear and not misleading statements, but now “this rule brings greenwashing very clearly into the focus of the FCA”.

What should companies pay attention to?

Blake suggested that companies should avoid cherry-picking.

She explained that the FCA’s guidelines require companies to consider the “lifecycle of a product or service, where applicable, when making sustainability-related claims”. She stated that “companies should avoid cherry-picking information if they don’t have a complete picture of the product lifecycle, and be specific about what they know and don’t know.”

“Transparency is critical in combating allegations of greenwashing,” she stressed.

Meanwhile, Cook noted that companies should ensure they can support claims with robust and credible evidence, and consider any third-party data they rely on.

“While this should not represent a major change for businesses given their existing legal obligations, businesses will need to consider how they demonstrate compliance with the new rule,” he added.

What are the consequences if rules are not followed?

“The FCA will take action against companies where it has reason to believe there is a risk of consumer harm or serious misconduct,” Blake said.

She pointed out that breaching the anti-greenwashing rule could lead to the FCA imposing fines, suspensions or even bans.

So with the implementation date less than a week away, Cook has warned businesses to ensure they have the necessary compliance processes in place and assessments completed by the end of this month to avoid inadvertently falling foul of the new anti-greenwashing rule.

However, let’s not forget that companies should already have some sort of system in place to combat greenwashing, as the consequences are not limited to those from the FCA.

Blake noted that “companies may also have to deal with other regulators in Britain, such as the Competition and Markets Authority (CMA) and the Advertising Standards Authority.”

Companies even face the possibility of civil lawsuits or significant reputational damage as ESG activism increases in the courts in England and Wales.

And it’s not only in the courts where ESG activism is thriving. The next generation of investors (Millennials and Gen Z) are placing more importance on ESG credentials when choosing a company to invest in, than any previous generation. A survey by asset management firm Amundi and the Business Times found that 82% of Gen Z and close to two-thirds of young millennial investors have exposure to ESG investments.

There’s more scrutiny than ever on ESG claims, from regulators, consumers and investors, highlighting the importance of the FCAs guidelines around greenwashing.

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