In May this year, the Financial Conduct Authority (FCA)’s anti-greenwashing rules came into force, applying to all regulated firms in the UK. Published as part of the regulator’s Sustainability Disclosure Requirements (SDR) regime, the new rules aim to enforce industry standards when it comes to the communication of sustainability-related claims within the financial services sector.
This is all part of a bid by the FCA to tackle so-called ‘greenwashing’ within the sector – in other words, any form of marketing or communications that provides misleading information about a company or its products’ environmental impact.
With finalised non-handbook guidance now published, the new rules require firms to ensure that any sustainability-related claims regarding products or services are “fair, clear, and not misleading.” Failure by firms to implement these guidelines may result in regulatory investigation or claims from investors who have been misled – making it especially important that regulated firms understand what the rules entail.
Why has the FCA introduced the anti-greenwashing rule?
The anti-greenwashing rule is part of the FCA’s new regime aimed at improving consumer trust and positioning the UK at the forefront of sustainable investment.
Setting out its ambition, the FCA said that: “We want to protect consumers against greenwashing so they can make informed decisions that are aligned with their sustainability preferences.”
What does the finalised guidance include?
On the whole, the final guidance follows the initial draft very closely. In the finalised guidance the FCA has included case study examples of sustainability branding, aimed at clarifying its expectations around what best practice looks like. These examples underline the importance of specific sustainability benchmarking, regular monitoring and measurement, and clear explanation.
In addition, the guidance sets out considerations for firms when relying on third-party data to substantiate sustainable claims. The FCA states that “where firms rely on third parties for information, they should consider the appropriateness of relying on data, research, analytical resources and other information...to substantiate the claims they are making.”
However, as legal firm Osborne Clarke points out, this does not necessarily outline a clear process for firms to follow. The firm therefore encourages organisations to document their reasons for using third-party data when backing-up sustainability claims, as well as to consider making that data available to customers for full transparency.
How prepared were financial services firms for the new rules?
Despite some UK-based fund managers beginning to apply investment labels - indicating early compliance with the new standards - it is notable that the FCA has acknowledged the challenges firms face in meeting these stringent requirements.
In response to feedback from firms needing more time to adjust product names and complete necessary disclosures, the FCA has granted limited temporary flexibility until 2 April 2025. This extension applies to firms that demonstrate credible efforts toward compliance but are hindered by exceptional circumstances.
In this context, ESG software provider and consultant Position Green has highlighted that many firms remain underprepared for the rapidly evolving ESG regulatory environment. According to a recent statement, 74% of financial services firms are actively investing in new technologies to enhance ESG data management and reporting capabilities.
As we approach 2025, the true extent of how effectively financial services firms have navigated this new regulatory landscape will become increasingly evident.
One active case so far, but undoubtedly more to come
In the wake of the guidance being published, the FCA has since disclosed one active enforcement case, which was opened in July this year – though it did not provide any further information on the type of firm under investigation, nor the misconduct in question.
Campaigners, meanwhile, are urging both the FCA and the Advertising Standards Authority (ASA) to launch an investigation into greenwashing by the UK’s five biggest high-street banks: Barclays, HSBC, Santander, NatWest and Lloyds. The campaign, known as ‘Make My Money Matter,’ is calling for regulators to investigate “significant inconsistencies” between the banks’ promotion of climate-related statements, and their real-life financing strategies.
It’s also worth noting that the FCA is currently consulting on whether to extend requirements to portfolio managers on how sustainable investments are labelled, in order to make climate-related consumer choices easier. This would include firms that manage a group of investments for consumers, offered as standardised products or tailored services.
How should financial services firms be responding?
Now is the time for financial firms to be reviewing their sustainability-related communications. With FCA scrutiny over enforcement of its new rules only set to ramp up as we move into 2025, all organisations need to be doing their due diligence in respect to how they communicate the sustainability of their products and services.
This should also include a review of internal ways of working to check that there are robust processes in place around the making of sustainable claims, in addition to firms ensuring that they have in place the appropriate level of regulatory insurance coverage for claims in this area.
Part of this process needs to involve ensuring existing insurance policies are suitable to meet this new wave of regulation. While many policies provide coverage for regulatory investigation expenses, these can typically be tied to the provision of a specific financial service and may therefore exclude representations in marketing material published by a firm. Additionally, s166 reviews, which can reasonably be expected to form part of FCA reviews into firms’ sustainability reporting, do not automatically form part of traditional regulatory cover. Firms need to consider whether a provision can be included under their insurance for this eventuality.