Anti-Greenwashing in the Spotlight: UK Firms Gearing Up for New Rules and Guidance

The UK’s Financial Conduct Authority (the FCA) has become increasingly concerned in recent years that some financial services firms are making sustainability-related claims which are exaggerated, misleading or unsubstantiated. Tackling 'greenwashing’ is therefore high on the regulatory agenda, and an area of focus for the FCA.  

As part of this, the FCA has introduced a new ‘anti-greenwashing rule’, which is due to come into force on 31 May 2024. UK regulated firms will need to ensure that sustainability-related claims made by firms are clear, fair, and not misleading and are consistent with the sustainability characteristics of the product or service.

The purpose of this new rule is to allow consumers to make informed decisions aligned with their sustainability preferences. The FCA also wants to create a ‘level playing field’ for firms with products which do represent a more sustainable choice and who make genuine claims about their products’ sustainability characteristics.

The new anti-greenwashing rule is consistent with the FCA’s broader regulatory drive to improve the clarity and accuracy of firms’ marketing and communication. It dovetails with the FCA’s Consumer Duty, which came into force last year. This Duty places an obligation on UK regulated firms to act in good faith towards consumers and ensure that consumers are provided with information that enables them to make informed decisions.

UK firms are also subject to separate rules on greenwashing enforced by the Advertising Standards Authority (the ASA) and the Consumer and Markets Authority (the CMA), who have both already published guidance relating to sustainability claims.

Which firms does the anti-greenwashing rule apply to, and what does it require?

The anti-greenwashing rule applies to all firms regulated by the FCA – no matter what their regulatory permissions or who their clients are.

These firms must ensure that any references 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 clear, fair, and not misleading.

“Sustainability characteristics” relate to the environmental and / or social aspects of financial products and services. For example, a pension provider may refer to a pension fund as being “socially responsible”. Or a bank may refer to a mortgage as being “green”.

From 31 May, the FCA expects any sustainability references in communications to be:

• Correct and capable of being substantiated through evidence.
• Clear and presented in a way that can be understood.
• Complete – they should not omit key information and should take into account the life-cycle of the product or service.
• Fair and meaningful in relation to any comparisons to other products or services.

The scope of the rule is not limited to retail business. Products and services that are marketed only to professionals, including institutional investors, are caught by the new requirements. For example, UK authorised firms marketing a private fund in the UK to institutional investors would need to ensure that any private placement memorandum or information memorandum complies with the anti-greenwashing rule.

What guidance is available to help firms comply with the new rule?

The FCA has published draft guidance (GC23/3) to help UK regulated firms to understand the FCA’s expectations under the anti-greenwashing rule. This is due to come into force on the same day as the anti-greenwashing rule. However, simply applying the guidance will not provide a ‘safe harbour’. Firms need to consider carefully how the rules apply to their business and communications in order to ensure compliance.

The guidance highlights that firms need to think hard about instances whereby the combination of wording and images of communications could give a misleading impression of sustainability characteristics. For example, firms should be wary of listing financial products next to “green” imagery (for example, a picture of a rainforest) when only one of the products has sustainability characteristics. Here, the imagery might misleadingly suggest that all the products are “green”.

Firms need to take care with comparisons and ensure that they are “fair and meaningful”. Any claims should therefore make clear what is being compared, how a comparison is being made and should compare like with like. An example the FCA gives is that where a firm makes a claim that a car insurance product is the “greenest car insurance on the market” information must be provided to back up this claim and the communication should make clear how this conclusion was reached and what comparisons the claim is based upon.

Firms must also ensure that they avoid claims that might be theoretically true but be misleading. For instance, if the proceeds of a bond are used to finance sustainability projects, it may be described as a “green bond”. However, where that bond’s proceeds are invested into making fossil fuel production more energy efficient, the FCA would not expect this to be marketed as a “green bond” as this would be contrary to investor expectations.

How are other UK regulators tackling greenwashing?

In 2021, the CMA published guidance for firms making environmental claims on goods and services. The CMA is able to take action against financial services firms for misleading claims under consumer protection legislation, although it would normally leave this to the FCA. Similarly, the ASA is also able to enforce the Committee of Advertising Practice’s (CAP) Code against firms making misleading advertising claims.

In 2022, the ASA banned two HSBC adverts which had appeared on bus stops. The ASA said that HSBC must “ensure that future marketing communications with environmental claims were adequately qualified and did not omit material information about its own contribution to carbon dioxide and greenhouse gas emissions.”

What should firms be doing now?

UK authorised firms must review all their existing customer communications (whether marketing or not) to establish whether they are making any kind of sustainability claims. Firms should then take a hard look at how any sustainability claims may withstand scrutiny under the new rules and guidance. Is there evidence to back up the claims, and is it readily available? Clear coordination between firms’ sales, marketing, operations, legal and compliance will be key to achieving compliant communications.

Linked to this, firms should review and strengthen their internal review processes for communications to cater for the anti-greenwashing rule. Communications should always pass through multiple lines of review, and firms may wish to consider whether additional checks may be carried out to avoid inadvertently breaching this new rule. Each firm’s relevant internal teams will need to work closely together to design and enhance internal processes for the approval of any communications and coordinate their messaging across different platforms and media.

Firms might want to consider some consumer behavioural testing to assess whether communications could be considered by consumers to be misleading. This is something the FCA has already promoted as part of the Consumer Duty.

The FCA has also reminded firms to check their sustainability-related claims regularly, as the underlying evidence could change.

Once the anti-greenwashing rule is in force, we expect the FCA to monitor for signs of greenwashing from a range of sources. As well as monitoring firms’ financial promotions, the FCA will also monitor client complaints, intelligence gathered on the quality of firms’ regulatory applications, and broader supervisory intelligence.

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Jessica Reed is a Partner and Edward Twigger is an Associate at Farrer & Co

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group