The Financial Conduct Authority (FCA) has published the finalised non-handbook guidance on its anti-greenwashing rule that comes into force later this month, on 31 May 2024, and will apply to all regulated firms in the UK. Additionally, the FCA proposes extending its sustainability framework.

Tackling greenwashing is a priority for the FCA, and it is bringing in the new anti-greenwashing rule to protect consumers, and to enable the FCA to take action against firms that make misleading sustainability-related claims about their products and services.

Results from the latest Financial Lives survey shows significant consumer interest in sustainable finance as 81% of adults surveyed would like their investments to do some good as well as provide a financial return. This work supports the long-term growth and competitiveness of the sector by helping businesses meet this demand and ensuring consumers who invest in sustainability-related financial products can make informed decisions.

Draft guidance relating to the rule was first published and consulted on in November 2023, at the same time that the FCA finalised its flagship sustainability disclosure requirements (SDR) and investment labelling regime amid significant recent supervisory developments in both the UK and the EU regarding the risks of greenwashing in the financial services sector.

The anti-greenwashing rule will be added to the ESG Sourcebook at ESG 4.3.1R and requires firms to ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service and is fair, clear, and not misleading. “Sustainability” refers to both environmental and social sustainability.

The finalised guidance follows the draft guidance very closely. One area of feedback from the consultation was a request for examples of good practice. The FCA has obliged and has included two examples of good practice that will be of assistance to firms. The takeaways from these examples are clear and robust standards for sustainability characteristics, continuous monitoring, and clear explanations in marketing materials.

An area of the guidance that remains unclear and will be of concern to many firms is the extent to which statements a firm makes about itself are caught by the new rule. The guidance says that the scope of the anti-greenwashing rule relates only to claims made regarding products and services.

It goes on to say that existing consumer protection law, including the guidance published by the Advertising Standards Authority and the Competition and Markets Authority, as well as FCA Principles 6, 7, and 12, can apply to sustainability-related claims that a firm may make about itself as a firm.

The FCA is also consulting on extending to portfolio managers the requirements on how sustainable investments are labelled and explained, making consumer choice easier. These are firms that manage a group of investments for consumers, which can either be offered as standardised products or tailored services.

The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers largely mirror those introduced for asset managers in November 2023. They include:

  • product labels to help consumers understand what their money is being used for
  • naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up

The FCA’s director of environmental, social and governance, Sacha Sadan said: “Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment.

“Our good and poor practice anti-greenwashing examples will help firms market their products in the right way. We continue to work closely with the ASA and CMA to address greenwashing.”

Screening of more than 40,000 funds from across the world with ‘ESG’ in their title found that 18% were found to have a negative impact relative to their market benchmark.

Similarly, a recent Research in Finance survey of 227 discretionary fund managers and investment advisors found that six in ten are holding back from investing in ESG funds for fears over exaggerated and misleading claims and labels.

Additionally, RepRisk found that one in every five cases of corporate risk incidents linked to ESG issues stemmed from greenwashing and misleading communications.