UK: FCA confirms anti-greenwashing guidance

Ahead of the anti-greenwashing rule (AGR) coming into force on 31 May, the FCA has published its finalised Guidance intended to support industry in meeting the standard. This builds on the FCA consultation back in November 2023 (you can find our client note on the FCA’s consultation on these guidelines here). 

If you were already familiar with that consultation, it is worth noting that the FCA guidance has not changed significantly since that version. The FCA has kept the finalised guidance quite principles-based and as such has not specifically commented on some key scoping questions that we know have emerged with some clients and industry participants, and so there remains a degree of ambiguity, albeit some comfort is provided in the confirmation within the Guidance that the intention is not to create new obligations (more on scoping below).

Background

Back in November 2023, the FCA published its policy statement containing the final SDR rules (see our separate client note here). This included the final version of the AGR, which requires all FCA-authorised firms to ensure that any reference they make to the “sustainability characteristics” of their financial products and services is:

• consistent with the sustainability characteristics of the product or service; and
• clear, fair and not misleading.

The finalised guidance published today provides industry with further detail on how to comply with the FCA’s AGR.

Timing

Whilst many firms had been hoping for a delay in the application of the AGR and guidance to give time for implementation, the FCA has confirmed that both will come into force from 31 May 2024 with all authorised firms needing to meet the rule on that date.  Firms will therefore need to ensure that internal work that is no doubt underway in reviewing and updating their external facing materials, and their marketing policies, guidelines and training is completed before this date.  As previously clarified the FCA nevertheless reiterate that asset managers who are not using labels but are using sustainability related terms in their naming and marketing won’t need to comply with the additional naming and marketing rules or produce associated disclosures under the SDR and labelling regime until 2 December 2024. 

Scope

The guidance and the anti-greenwashing rule itself will apply to all FCA-authorised firms who make claims about the sustainability characteristics of their products and services. In this context “sustainability characteristics” encompasses only “environmental and/or social characteristics”, (with the FCA viewing governance “to be an enabler of environmental or social outcomes, rather than an end in itself”). 

Additionally, the final guidance emphasizes that sustainability claims can comprise a huge variety of claims, given they can be present in (but are not limited to) “statements, assertions, strategies, targets, policies, information, and images”. Importantly, the rule also applies to communications to non-retail customers (e.g., it would apply to sustainability claims made by an FCA-authorised firm to another business), and the guidance takes this into account.  Firms will no doubt be well underway on their review of external materials in order to ensure that they meet this rule from its in-force date.

Scoping questions?

The FCA has kept the finalised Guidance principles‑based, and as such has not commented explicitly on key scoping questions, including the application of the rule to unregulated services and products, and territorial scope, therefore a degree of ambiguity as to the scope of the AGR remains.  However the language of the final document does appear to seek to give a degree of comfort that there is scope to read across exemptions and the territorial scope from the COBS rules. The Guidance is stated to be “consistent with existing expectations and does not create new obligations for firms”. Further, the FCA reiterate that the AGR itself is “intended to complement and be consistent with” existing rules in the FCA handbook which require firms to ensure the information they communicate is fair, clear and mot misleading and “[i]t is not a substitute for, and is not intended to override, any other rules in the Handbook where firms may be subject to fair, clear and not misleading rules in specific circumstances” (and guidance has been included in the relevant sourcebooks to remind firms of the anti-greenwashing rule when they comply with other obligations). 

Interplay with the Consumer Duty

As expected, the final Guidance retains emphasis on the close links between the AGR and the Consumer Duty – but also reiterates that the AGR applies irrespective of whether firms are subject to the Consumer Duty (e.g., in relation to claims made to non-retail investors).  There is recognition however that communications, and the information provided therein, should be useful for the intended audience – “where a claim is being communicated to a professional client, firms may not need to include the same information or present it in the same way as they would for a communication addressed to a retail client”. The FCA suggest that where appropriate, consumer testing may be helpful to ensure appropriate balance of the need for clear information with sufficient detail so that the audience can understand the claim.

Guidance in detail: expectations and examples

The guidance is structured according to four requirements for sustainability claims, with examples to support each.  The examples broadly mirror those contained in the draft guidance, however in response to consultation feedback the FCA has included an example to help demonstrate how claims about social characteristics may be considered misleading, and has included a couple of examples of good practice to illustrate how firms could be meeting the requirements.  In response to requests for more examples covering different sectors and types of firm, the FCA directs firms to consider if other industry guidance or standards could help provide information that is more tailored to their sector. 

In practice the effect of the AGR (and existing rules) means that sustainability references should be:

• 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/service; and
• fair and meaningful in relation to any comparisons to other products or services.

1. Correct and Capable of being substantiated:  the FCA states that this requirement means that a firm’s products / services “should do what they say they do” and firms should ensure they are capable of substantiating all their claims. The examples suggest the FCA will take a hard-line view on firms’ presentation of sustainability information. E.g., if a fund claims to be “fossil fuel free”, but actually the fund includes investments in companies involved in the production/sale/distribution of fossil fuels where the revenue earned is below a certain threshold, then this would be a breach of the anti-greenwashing rule. Therefore, firms will need to undertake a careful exercise reviewing all of their public materials to ensure that each statement can be justified with evidence.

2. Clear and presented in a way that can be understood: the FCA states that in order to meet this requirement, technical terms should be explained, the use of vague or broad terms may be unclear, and firms should be aware of “the overall a visual presentation of a claim can create”. Significantly, the FCA suggests that the use of images alone could create a misleading impression to customers (even if the textual statements made are all correct). The FCA gives the example of a firm placing a rainforest image at the top of its webpage with an overlay of the text, “Sustainable Savings”. This may give the impression that the firm will use deposits in all savings accounts to help create positive change – however if only deposits in one of the accounts are used to fund sustainable projects, then the use of words and images is potentially misleading.

3. Claims should be complete: the FCA has stated that claims should convey “a representative picture of the product or service” with no omission or hiding of important information that might influence decision‑making.  Further, the limitations of any information/data/metrics should be clearly and prominently disclosed. 

Notably, the FCA also suggests that firms may need to disclose the negative characteristics of a product/service in order to ensure the claim is complete: “Claims should…not focus solely on the positive sustainability characteristics of a product or service, where other aspects may have a negative impact on sustainability.” The FCA gives the example of a bank promoting its green bonds, where eligible activities include projects to improve the energy efficiency of fossil fuel production and distribution. If this information is not included in the promotional materials, this could be misleading its audience. 

In addition, the FCA gives an example of a benchmark administrator which claims to be “sustainable” by excluding companies with ESG ratings “lower than 3” – but which does not provide any information on what the rating assesses, the scale of the rating or the rationale for choosing the threshold. The FCA notes that the threshold could be “in reality, not a high bar, as standards may vary in some markets”. This suggests the FCA is requiring firms to produce extremely thorough contextual information related to any sustainability claims.

4. Comparisons should be fair and meaningful: any comparisons made when comparing a product/service to a previous version of the same product or to a competitor’s product/service should be fair and meaningful, by clarifying what is being compared and how a comparison is being made, and by comparing like with like. For example, if an insurer offers “The UK’s Greenest Car Insurance”, it will need to demonstrate how it has reached that conclusion and the comparisons on which it was based.

Resources

You can find the Final Guidance (FG24/3) here