The FCA’s Anti-Greenwashing Rule Phiroza Katrak

The UK’s Financial Conduct Authority (FCA) published its Sustainability Disclosure Requirements (SDR) last year and the anti-greenwashing rule is the first in the series of a phased application of the SDR. The FCA’s recently-published accompanying guidance is welcome as it provides clarity on the regulator’s expectations and includes examples and case studies of good practice.

The anti-greenwashing rule comes into effect on 31st May 2024 and applies to sustainability-related claims by FCA-authorised firms about their financial products and services being made available to persons in the UK.

Quite simply, any sustainability claim made must be fair, clear and not misleading and must be consistent with the sustainability characteristic (environmental and/or social) of the product/ service.  The rule also covers financial promotions. 

The regulator is looking for factual accuracy, clarity, completeness, transparency and credible substantiation of the sustainability claim as well as fairness in any comparisons being made. The FCA can challenge firms which it considers are making misleading claims.

Sustainability characteristics can be present in several forms. They could be contained in the sustainability assertion or statement itself or within the policy, strategy, target, information and images relating to a product or service and in the communication relating to the product or service.  So, what should you (and the FCA) expect?

Sustainability references should be:

  • Factually correct and capable of being substantiated
    • Claims should not overstate or exaggerate the product’s or service’s sustainability or positive environmental and/or social impact. Not only should there be credible evidence to support the claim(s), but the claims and evidence should be regularly reviewed for so long as those claims are being communicated.
  • Clear and presented in a way that can be understood
    • Claims should be transparent, straightforward and useful, with technical language explained for the intended customer. [Claims communicated to a professional client need not include the same information or be presented in the same way as to a retail client.]
    • Alongside claims, any use of images, logos and colours could combine in creating an overall impression, so consideration should be given to how these may be perceived when presented in conjunction with other sustainability characteristics of a product or service.
  • Complete
    • Important information that might influence decision-making should not be hidden or omitted. Focus on positive impacts should not mask aspects that have negative impacts on sustainability.
    • The claim(s) should consider the full life cycle of the product.
    • There should be clear and prominent disclosure where claims are only true if certain conditions apply, or if there are limitations in information, data or metrics used.
    • Benchmarks and/or sustainability performance thresholds should be explained so that it can be determined whether the ‘bar’ and its level are appropriate.
  • Comparisons to other products or services are fair and meaningful
    • Whether to competitors’ products or services or to the firm’s previous versions, any comparison should be fair and meaningful to enable consumers to make informed choices.
    • They should be like-for-like and clear in what is being compared. Market-wide evaluations based on limited samples have the potential to mislead. Here too, there should be evidence to substantiate the comparison(s) being made.
    • Claims about sustainability characteristics which only meet a minimum legal or compliance requirement, while true, could incorrectly imply a product or service is superior to others available; such claims could be misleading.

And finally, the regulator has reminded firms that the FCA’s Principles 6 (customers’ interests) and 7 (communication with clients) apply to sustainability-related claims that the firm may make about itself.

The next stage in the implementation of the FCA’s Sustainability Disclosure Requirements will be effective on 31st July 2024 when fund management companies can begin to use the four sustainability labels – Focus, Improvers, Impact and Mixed Goals. The naming and marketing rules come into force four months later on 1st December.

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