The new rule and proposed guidance
The anti-greenwashing rule will sit in Chapter 4 of the ESG module of the FCA Handbook. It is ESG 4.3.1R which provides that: "A firm must ensure that any reference to the sustainability characteristics of a product or service is: (a) consistent with the sustainability characteristics of the product or service; and (b) fair, clear and not misleading."
The FCA proposes adding text to its general financial promotion and customer communication rules reminding firms of their obligations under ESG 4.3.1R. Some have questioned what a specific anti-greenwashing rule really adds to the FCA's powers, given the existing requirement that financial promotions should be fair, clear and not misleading. In practice, this new rule is signalling the regulatory priority that the FCA now gives to tackling greenwashing, with the aim of protecting consumers, increasing their trust in sustainability-related claims and creating a level playing field for firms whose products and services genuinely represent a more sustainable choice, thus encouraging the flow of capital into products that can drive positive change.
The rule applies to all communications about financial products or services which refer to the environmental and/or social (i.e. ‘sustainability’) characteristics of those products or services. Sustainability-related references can be present in, but are not limited to, statements, assertions, strategies, targets, policies, information, and images. The rule applies to all communications, not just communications to retail clients/consumers.
Alongside the policy statement, the FCA also published a consultation on draft guidance on the FCA's expectations of firms under the anti-greenwashing rule (GC23/3) (the "Draft Guidance"). The deadline for responses to the consultation is 26 January 2024 and the final guidance will come into force on the same date as the rule.
The Draft Guidance says the FCA expects firms to ensure their sustainability-related claims are:
- 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 life cycle of the product or service; and
- fair and meaningful in relation to any comparisons to other products or services.
Sustainability related claims in the insurance sector
Sustainability-related claims are being made by insurers at both the entity level (e.g. sustainability targets or responsible underwriting strategies or frameworks) and at the product level (e.g. 'green' insurance products). Insurance products claiming to be 'green' or 'sustainable' include, for example, 'green' motor vehicle insurance operating on a 'pay as you drive' basis incentivising less driving and insurance for 'greener' buildings allowing repairs following a loss to be made with materials with a lower carbon footprint. Green claims can be made anywhere in the insurance life cycle, from product development, marketing and delivery, to ongoing management of a product. Some insurers are also making statements about their services in the form of commitments to stop or phaseout the underwriting of new fossil fuel projects, and increasing their support for the transition to net-zero by underwriting new technologies or renewable energy projects. We are also seeing statements about offerings to help improve the resilience of communities most vulnerable to climate change.
Insurers are already subject to other legislation and guidance that applies to sustainability claims in some circumstances. This includes consumer protection law and the Competition and Markets Authority's guidance on environmental claims to help firms navigate their obligations in this regard and avoid misleading consumers. The UK CAP and BCAP Codes cover environment-related advertising. The Advertising Standards Agency (ASA) is particularly active in enforcing its rules, with over 15 decisions on green claims this year. Notably HSBC had an adverse finding from the ASA last year. The ASA did not believe “that consumers would understand the intricacies of transitioning to net zero, and would not expect that HSBC, in making unqualified claims about its environmentally-beneficial work, would also be simultaneously involved in the financing of businesses that made significant contributions to carbon dioxide and other greenhouse gas emissions and would continue to do so for many years into the future.”
The FCA states that it has worked closely with the CMA and ASA to ensure that the FCA's guidance is complementary.
The FCA's greenwashing rule will apply to both entity level and product level claims if statements relate to sustainability of the product or service the insurer offers. It may sometimes be difficult to draw a bright line between the product or service being sold to customers, on the one hand, and the sustainability characteristics of the firm itself, on the other, and the Draft Guidance reminds firms that information about the firm itself may be considered part of the 'representative' picture' in a decision-making process by customers, so it is equally important to ensure that these claims are also fair, clear and not misleading. Failure to do so, even if not caught directly by the new greenwashing rule, could potentially fall foul of the FCA's Principles for Businesses, including the Consumer Duty.
The FCA has stated that it will apply its usual supervisory and enforcement approaches to policing compliance with the anti-greenwashing rule. It will respond to compliance issues when they arise and act if it has intelligence that a firm may not be meeting the requirements, including taking enforcement action in cases of serious misconduct. Any such enforcement action by the FCA will prompt interest from other stakeholders, increasing the risk of litigation by parties that consider they have suffered damage as a result of misleading statements, as well as possible interest from other regulators.
Action to be taken by insurers
Firms should ensure that their product governance processes and their controls in relation to financial promotions and other customer communications, as well as entity level communications, have robust checks to mitigate greenwashing risks. Effective governance and internal policies should ensure a consistent approach is taken and that sustainability statements and their supporting evidence are reviewed on a regular basis.
The Draft Guidance provides further details on meeting the requirements:
- Statements should be capable of being substantiated at the point in time at which they are made with robust, relevant, and credible evidence. This is not easy to do when the UK still has not adopted a green taxonomy (albeit the EU's Taxonomy could be used in the meantime) and information about sustainability metrics may be incomplete and technical and difficult to interpret. Firms should think carefully about whether they have the appropriate evidence to support the claims they are making. Firms should regularly review their sustainability-related statements and the evidence that supports them, to ensure it still stands up to scrutiny. Where a firm’s claim makes specific reference to the evidence that supports it, firms may wish to consider whether it would be helpful to make that evidence publicly available in a way that is easily accessible.
- The sustainability statements that firms make should be transparent and straightforward, using terms that will be generally understood by the intended audience, so any technical terms should be explained unless their meaning is clear and widely understood. The use of vague, broad, or general terms may be unclear and confusing.
- Claims should be presented in a balanced way and not focus solely on the positive sustainability characteristics of a product or service, where other aspects may have a negative impact on sustainability. Firms should consider the whole life cycle of a product or service when making sustainability-related claims. Firms should not cherry-pick positive information. Where comparative claims are made, any evidence to substantiate those should cover all products or services compared.
- Firms should also be aware of the overall impression that can be created through the visual presentation of statements about their products and services. The images, logos and colours used are an important part of the overall presentation of a claim. They should be particularly careful when using images related to sustainability. The FCA gives as an example the use of an image of a rainforest on a webpage where not all products and services accessed through that web page had evidenced sustainability-related characteristics.
The FCA's draft guidance gives a number of hypothetical scenario examples of poor practice. One of these concerns an insurer offering "The UK's greenest car insurance" but with no information to demonstrate how it has made the most positive environmental impact compared with all other UK car insurance products. Some may view an example of this kind as overly simplistic. In practice, a web search for "green insurance" turns up a variety of sustainability-related claims by insurance intermediaries where it is hard to see how these can be substantiated.
Next steps
An implementation date of 31 May 2024 is a challenging one for any insurer who needs to make changes to promotional material and other customer communications, so we recommend that insurers start work now, rather than waiting for final Guidance next year. The FCA's direction of travel is clear now and amendments to the Draft Guidance are unlikely to make any substantial change to that.
For further information about the matters discussed please speak to Angela Hayes, Mathew Rutter or Annabel Walker or your usual DACB contact.
