FCA publishes finalised guidance on the anti-greenwashing rule

The FCA has published its finalised guidance on the anti-greenwashing rule, alongside a consultation paper (which we summarise here) on the regulator’s proposal to extend the Sustainability Disclosure Requirements and investment labelling regime to firms providing portfolio management services. Both the anti-greenwashing rule (the Rule) and the guidance are due to come into force on 31 May 2024. 

To briefly recap, the FCA consulted in its draft anti-greenwashing rule guidance at the end of November 2023. It received 69 responses to its consultation and states that responses were broadly positive. The finalised guidance therefore largely follows the draft guidance.

Scope

The Rule will apply to all communications that mention sustainability-linked characteristics of products or services made available for clients in the UK by FCA authorised firms. This includes images and logos used in marketing. It applies to firms that approve financial promotions for unauthorised persons for communication in the UK, and applies irrespective of whether such firms are subject to the Consumer Duty. The Rule is intended to complement and be consistent with other rules in the FCA Handbook.

The Rule does not cover sustainability-related claims made about firms themselves. But the Guidance does pointedly remind firms that FCA Principles 6, 7 and the Consumer Duty (Principle 12) do apply to such claims.  

Four key principles 

The FCA’s guidance sets out four key principles for sustainability-related claims and references:

1. Sustainability references should be correct and capable of being substantiated

Firms must ensure the factual accuracy of their claims, without overstating or exaggerating the sustainability impact of a product or service. These claims should also be supported by credible evidence at the time they are made, and consideration should be given to making the evidence accessible to the public. 

For example, if a firm makes a statement that an investment fund is “fossil fuel free”, it would be inconsistent with the Rule if that fund’s terms and conditions highlighted that it did invest in companies involved in the production, sale, and distribution of fossil fuels, even if those investments fell below a de minimis threshold.

Good practice for a firm making sustainability claims would be, for example, to establish clear and robust standards for selecting firms as investments. The FCA also expects regular reviews of claims to be made, and that approvers of financial promotions should actively monitor compliance with the financial promotions rules that apply over the lifespan of the promotion.

2. Sustainability references should be clear and presented in a way that can be understood 

Firms should use terms that are easily understandable by the intended audience and they should explain any technical terms used unless their meaning is clear. Firms must also ensure that their use of sustainability-related visuals (including images, colours and logos) do not mislead or improperly convey the factual information being stated. 

As an example, it may be misleading if a firm uses an image of a rainforest and a generic heading like “sustainable savings” on a webpage to advertise a range of savings products if, in fact, only one of the products has sustainability characteristics.

3. Sustainability references should be complete – they should not omit or hide important information

Information which may influence decision-making should not be omitted or disguised. Firms must clearly state if any claims are based on conditions or caveats, and should disclose any limitations in the information or data used. Firms should present claims  in a balanced manner and should not seek to highlight only the positive impacts while concealing the negative ones. Firms should also be transparent about the specific stage of the lifecycle of the particular product or service to which a claim relates. For example, if a product is intended to promote energy efficiency in fossil fuel production (along with other sustainable objectives), this fact should be highlighted to consumers. The FCA also notes the importance of explaining ESG ratings, in particular whether they relate to the assessment of ESG-related risks or sustainability impacts. 

4. Comparisons should be fair and meaningful

The FCA emphasises that any comparisons made either to a previous version of a firm’s product or service, or to a competitor’s product or service, should be fair and meaningful. Any comparative claims must allow the audience to make an informed decision about the products or services. Firms should avoid overstating claims about the sustainability of products or services that merely meet the respective minimum legal requirements for sustainability and firms should avoid misleading the audience about the product’s superiority in the market. 

For example, if a firm claims that by purchasing a particular investment product a consumer will “reduce emissions” more than if they bought other bonds, the firm should be clear whether that is a reference to Scope 1, Scope 2 or Scope 3 emissions – terms which the FCA highlights are technical in nature and not widely understood by consumers. The firm should also make clear whether the comparison is based on a small sample or the whole of the market.

Comment

The introduction of guidance that helps firms to understand the FCA’s expectations around making sustainability related statements is likely to be generally welcomed by the market. Whilst the framework is intended to largely confirm pre-existing requirements, the guidance is broad and may require changes to the processes that firms have in place. Firms will need to carefully consider their communications, procedures and policies to ensure they have robust controls in place and can meet any additional regulatory expectations resulting from this framework.