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The FCA’s combat against greenwashing (Anti-greenwashing guidance)

Published on May 24, 2024 by Rakesh Jamdhade

Introduction

To protect consumers against greenwashing, the Financial Conduct Authority (FCA) finalised an anti-greenwashing rule in November 2023 as part of its broader Sustainability Disclosure Requirements (SDR) and investment labels regime.

It published final guidance on 23 April 2024 to help companies implement the rule that will come into effect on 31 May 2024.

Background

The FCA has been conducting a Financial Lives Survey in recent years and using the findings for policy decisions.

According to its latest survey, consumers are more interested in sustainable finance, with 81% of the respondents wanting their investments to have a positive impact on the environment while providing financial returns.

To meet such high demand for sustainable investments, companies could provide false or misleading information about their products and services being environmentally friendly. The FCA, therefore, introduced a package of measures, including the anti-greenwashing rule, to help investors navigate the sustainable investment space and to increase market trust.

About the anti-greenwashing rule

The number of greenwashing cases around the world spiked last year, according to Reuters. The following table lists the largest greenwashing fines levied by the FCA and the US Securities and Exchange Commission (SEC) in recent years:

Fine Reason for fine
USD25m Potentially marketing ESG funds as being “greener” than they were
USD5.5m (total) Claiming that products were made from environmentally-friendly materials when in fact they were made from other materials
USD4m Misleading customers by failing to follow ESG investment policies
USD1.5m Failing to implement ESG policies and overstating the ESG value of a funds
USD960.5k Making unsubstantiated claims on labels
 

Source: Financial Conduct Authority | FCA and SEC.gov | Enforcement

According to the FCA’s new rule, all FCA-authorised firms need to ensure that any reference to environmental, social and governance (ESG) factors, i.e., sustainability characteristics of their products and services, is consistent with the sustainability characteristics of the product or service and is fair, clear and not misleading.

The rule applies when a company

  • communicates with customers in the UK in relation to a financial product or service

  • communicates a financial promotion (or approves a financial promotion for communication) to a person in the UK

This rule empowers the FCA to challenge a company if it believes the company is making misleading claims about its products or services.

The FCA states explicitly that the anti‑greenwashing rule intends to complement and be consistent with other rules such as Principles for Businesses (PRIN) and Consumer Duty. It is not a substitute for, and does not intend to override, any other rules that subject a company to making fair, clear and non-misleading statements.

Scope of guidance

The guidance is designed to help companies interpret the rule and understand the FCA’s expectations from sustainability claims about products and services.

The FCA highlights four points to help companies understand and implement the rule. In summary, the guidance expects sustainability references to be

  • Correct and able to be substantiated – The claims companies make should be factually correct and should not be overstated or exaggerated. Companies should regularly review their claims and ensure the evidence is still relevant and in line with the existing sustainability characteristics of the products and services.

  • Clear and presented in a way that can be understood – The claims companies make should be transparent and straightforward. Companies need to be aware of visual presentation of the claim (images, logos and colours) and should not convey a false impression.

  • Complete – Companies should not omit or hide important information that could influence decision‑ They should consider the lifecycle of the product or service when making sustainability-related claims and present claims in a balanced way by including both positive and negative sustainability impacts.

  • Comparisons – Companies should be careful when comparing a product or service with its previous version or with competitors’, ensuring the comparison is fair, meaningful and not misleading.

Next steps

The FCA is also consulting on extending the SDR and investment labels regime to portfolio management. This means the anti-greenwashing rule will also apply to companies providing portfolio-management services after discussions are concluded by 14 June 2024.

How Acuity Knowledge Partners can help

We are a trusted partner in the global market, offering compliance and other services. We enable our compliance clients to manage increasing demands on their teams by providing customised managed services solutions; these include specialised skills and technology to effectively manage and control the risks of wall-crossing. This has resulted in operational efficiency, resilience and significant cost savings. We have managed high volumes for clients, particular after the pandemic, when compliance teams have seen a significant increase in workload relating to tasks such as trade surveillancecommunications surveillancedistribution compliance and transaction monitoring. For more details on our compliance offering, see here: https://www.acuitykp.com/solutions/central-compliance.

Sources:


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About the Author

Rakesh Jamdhade has over 11 years’ experience of working with Investment firms for Compliance department. His expertise spans across Trade surveillance and ESG compliance monitoring. Prior to joining Acuity, he was associated with BNP Paribas and Accenture. He holds a Master’s degree in Business Administration, specializing in finance. At Acuity Knowledge Partners, he is part of Corporate and Forensic Compliance team and specializes in Best Execution, Fair allocation and ESG monitoring.

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