The anti-greenwashing rule: Proposed FCA guidance

Introduction

On 28 November 2023, the Financial Conduct Authority (FCA) launched a consultation on its proposed new guidance to support the anti-greenwashing rule. The anti-greenwashing rule itself was published on the same day, as part of the FCA’s Policy Statement PS23/16 which set out final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels.

The proposed guidance, published in Guidance Consultation GC23/3 (GC23/3), is intended to help FCA-authorised firms that make sustainability claims about products and services to better understand the regulator’s expectations under the new anti-greenwashing rule and other existing, related requirements. This briefing note explores the key areas covered by the guidance.

Why is the FCA introducing the anti-greenwashing rule and guidance?

The number of financial products and services in the market that claim to have sustainability characteristics has been growing in recent years in response to increasing consumer demand. This has given rise to a greater risk of greenwashing and concerns that firms’ sustainability-related claims may be exaggerated, misleading and unsubstantiated. The FCA hopes that introducing the anti-greenwashing rule (as part of its broader SDR and investment labels regime) will help to protect consumers from greenwashing so they can make informed decisions aligned with their sustainability preferences, while also creating a level playing field for firms offering products and services with genuine sustainable characteristics.

When the FCA consulted on its proposed anti-greenwashing rule in Consultation Paper CP22/20, it found that while the majority of respondents agreed with the rule, some felt guidance was needed to help industry better understand it. The guidance proposed in GC23/3 is intended to address this need and support implementation of the rule.

The anti-greenwashing rule

The anti-greenwashing rule, which will be set out in the ESG Sourcebook (in ESG 4.3.1R), reiterates and clarifies the existing requirements for regulated firms around sustainability-related claims. Under the rule, FCA-authorised firms must 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 clear, fair and not misleading. The rule is being introduced to enable the FCA to challenge firms if it thinks they are making misleading claims about their products or services and, if appropriate, to take further action.

The FCA has not provided a specific list of terms that would fall within the anti-greenwashing rule and instead states that it will apply to references to environmental and/or social characteristics of financial products or services. Arguably this makes compliance more difficult for firms who will need to make their own assessment of what is within scope. And its not just in relation to terminology, the scope of communications can also be very wide in the sense that sustainability-related references can be present in, say, statements, assertions, strategies, targets, policies, information and images.

Who does the guidance apply to?

All FCA-authorised firms that make sustainability-related claims about their products and services will be covered by the guidance. This will include firms that approve financial promotions for communication in the UK by unauthorised persons (once they have been approved through the FCA’s new regulatory gateway, which comes into force in February 2024).

An overview of the proposed guidance

Under the FCA’s proposed guidance, in order to comply with the anti-greenwashing rule firms should ensure their sustainability-related claims are:

• Correct and capable of being substantiated.
• Clear and presented in a way that can be understood.
• Complete – they should not omit or hide important information and should consider the full lifecycle of the product or service.
• Fair and meaningful in relation to any comparisons to other products or services.

For firms that are also subject to the Consumer Duty, the FCA emphasises in GC23/3 that they should consider the proposed guidance alongside their obligations under the Duty, to help them deliver good outcomes for retail customers. This includes ensuring customers receive the right information, at the right time and in a way they can understand, to help them make informed decisions.

Correct and capable of being substantiated

To meet this aspect of the FCA’s expectations, firms will need to ensure any claims they make are factually correct. This includes not stating or implying features of a product or service that are not true, not overstating or exaggerating its sustainability impact, and ensuring that claims only give the impression that the product or service has the sustainability characteristics it really has, avoiding using any conflicting or contradictory information. Firms should be able to support these claims with robust, reliable and credible evidence at the time they are made, and should consider making supporting evidence publicly available (in a way that is easily accessible) if it is specifically referred to in a claim.

Firms will also be expected to regularly review their claims and any supporting evidence, and approvers of financial promotions should take reasonable steps to periodically monitor the promotion’s ongoing compliance with the anti-greenwashing rule as well as all other applicable financial promotion rules over the lifetime of the promotion.

The guidance gives two illustrative examples, including where a firm makes a statement that an investment fund is “fossil fuel free” but explains in the terms and conditions that the fund does invest in companies involved in the production, sale and distribution of fossil fuels albeit below a certain threshold. This statement would not be compliant with the anti-greenwashing rule.

Clear and presented in a way that can be understood

The FCA expects claims made by firms to be transparent and straightforward, using terms that are generally understood by the intended audience. Any technical terms should be explained unless their meaning is clear, and firms should consider whether the information they are providing is useful. The visual representation of a claim (including images, logos and colours) is also important, and firms should ensure they do not undermine a factually correct claim with potentially misleading visuals.

The proposed guidance also refers to the Consumer Duty, highlighting that firms subject to the Duty should test their communications where appropriate when making sustainability claims to ensure they can be understood by consumers. They should also ensure they have all the information they need to understand and monitor consumer outcomes.

The example given for this element of the guidance is where a firm uses a large image of a rainforest and the heading ‘Sustainable Savings’ at the top of a webpage about savings accounts where only one of those accounts actually invests in sustainable projects. This would be potentially misleading.

Complete – not omitting or hiding important information

Sustainability claims should convey a representative picture of the product or service and should not omit or hide important information that might influence decision-making. This includes clearly and prominently stating any applicable conditions or caveats as well as the limitations of any information, data or metrics used in a claim. It also includes presenting claims in a balanced way and not highlighting only positive sustainability impacts where this disguises negative impacts.

The whole lifecycle of a product or service should also be considered when making sustainability claims and it should be made clear where a claim refers to a specific part of a product’s lifecycle. 

One of the examples given for this part of the guidance relates to environmental, social and governance (ESG) ratings. If a commonly tracked benchmark claims to be sustainable by excluding companies with ESG ratings “lower than 3” but the benchmark administrator does not specify what that rating aims to assess (e.g., sustainability-related risks or impact) or explain the scale the rating uses, this does not provide complete information and could result in users and end-investors being misled as to the product’s sustainability outcomes.

Fair and meaningful comparisons

Finally, the FCA expects the claims made by firms when comparing a product or service, either to a previous version of the same product or service or a competitor’s product or service, to be fair and meaningful, enabling consumers to make informed choices. Claims that compare the sustainability characteristics of products and services should make clear what is being compared and how that comparison is being made, and should compare like with like – for example, a claim has the potential to mislead if it appears to make market-wide comparisons but is in fact based on a limited sample.

The guidance also flags that firms should be careful when making claims about a product or service’s sustainability characteristics where it is simply meeting minimum legal requirements – these claims could be misleading if they wrongly give the impression that the product or service is superior to others.

The FCA gives the example of an insurer offering “The UK’s Greenest Car Insurance”, which would likely give the impression that the product has the most positive overall environmental impact of all UK car insurance products. Although this may be accurate, no information is given to back up the claim – the insurer should make it clear how this conclusion was reached and what comparisons the claim is based on.

What are the next steps?

The deadline for responding to GC23/3 is 26 January 2024, after which the FCA plans to review all responses and, subject to the views received, publish its finalised guidance in early 2024. The FCA is proposing to bring the guidance into force on 31 May 2024, alongside the anti-greenwashing rule itself. With only five months to go firms should therefore start considering which of their communications fall within the new anti-greenwashing rule and what enhancements to them need to be made.