FCA’s proposals to clamp down on greenwashing

Published 6 December 2022

It has been clear for some time that the FCA is stepping up its enforcement strategy and supervisory engagement in relation to purportedly sustainable finance. In the clearest indication of the direction of travel to date, the FCA recently issued a raft of new proposals aimed at clamping down on greenwashing. This forms part of the commitment made in the FCA’s ESG Strategy and Business Plan to build trust and integrity in ESG-labelled instruments and products.

The FCA is proposing to introduce:

1. A general anti-greenwashing rule applicable to all regulated firms.
2. Three categories of sustainable investment product labels, including one for products improving their sustainability over time – underpinned by objective criteria.
3. Restrictions on how sustainability-related terms, such as “green” and “ESG”, can be used in names and marketing for products which don’t qualify for the sustainable investment labels.
4. Disclosures to help consumers understand the key sustainability-related features of an investment product, and more detailed disclosures, suitable for institutional and retail investors.
5. Obligations on distributors of products, such as investment platforms, to ensure that labels and disclosures are accessible and clear.

The current consultation ends on 25 January 2023 and we can expect the FCA to publish its final rules by 30 June 2023. While many of the rules on disclosures and marketing by companies are not expected to come into force until, tentatively, 30 June 2024 to 30 June 2026, the FCA’s general anti-greenwashing requirement will become effective immediately on the publication of its Policy Statement, provisionally from 30 June 2023.

Why have these proposals been made now?

The FCA defines greenwashing as 'marketing that portrays an organisation's products, activities or policies as producing positive environmental outcomes when this is not the case'. The FCA states that exaggerated, misleading or unsubstantiated claims about ESG credentials ‘damage[s] confidence’ in these products, and the regulator wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have.

Given that ‘green’ investments have a global value of some £30 trillion and on the London Stock Exchange there are now 20 renewable ‘energy-focused’ investment companies, it is essential that greenwashing is subject to regulatory oversight. The need for the FCA to take steps to protect against greenwashing was made clear in a report by the House of Commons Treasury Committee in April 2021, stating that ‘HM Treasury must ensure that the FCA has the appropriate remit, powers, and priorities to prevent the greenwashing of financial products available to consumers’. There has also been growing pressure from activist groups such as ClientEarth for the FCA to make firm commitments on climate change and sustainability.

In July 2021, the FCA’s “Dear Chair Letter” set out its stance on greenwashing, providing a series of “guiding principles” to authorised fund managers dealing with funds with a sustainability and ESG focus.

Other regulatory regimes:

The FCA is one of a number of regulators tightening regulation around greenwashing. In the UK the Competition and Markets Authority (“CMA”) has been particularly active, having implemented a ‘Green Claims Code’ in September 2021, and, in January 2022, announcing that it would be reviewing environmental claims made by the fashion retail sector.

Further afield, the European Commission has taken steps to tighten restrictions on greenwashing by advancing an amendment to the Unfair Commercial Practices Directive to include ‘environmental characteristics,’ such as a product’s durability, repairability and environmental and social impact.

The EU has also introduced (i) the Sustainable Finance Disclosure Regulation (”SFDR”), to prevent greenwashing and increase transparency surrounding sustainability claims made by financial market participants, and (ii) the Corporate Sustainability Reporting Directive (“CSRD”). The CSRD requires all large companies to publish regular reports on their environmental and social impact activities, and other sustainability issues. The rules will apply in three stages from 1 January 2024 to 1 January 2026.

Businesses in the finance and insurance sectors are also covered by the EU Taxonomy for Sustainable Activities, a classification system for organisations to pinpoint which of their economic activities, including investments, can be considered environmentally sustainable.

Consequences of the clampdown

Whether the FCA’s proposals have the desired effect remains to be seen, but it is clear that businesses operating anywhere in the financial services sector will need to have an increased focus on ensuring that any ESG-related statements are clear, fair and not misleading. There is also the potential for other consequences of the FCA’s proposals, as follows:

“Green-hushing”?

There is a suggestion that the increased regulatory scrutiny could lead to firms ‘green-hushing’. Companies could be so concerned about regulatory action that they err on the side of not referring to their green credentials in marketing materials. For some, the perceived inability to market their green credentials could lead to decisions not to take steps towards sustainability at all, creating the opposite result of what is intended in the financial services sector.

A sudden increase in litigation?

Greenwashing is certainly a buzzword at the moment, and consumers and investors are increasingly aware of their rights if they invest in products on the basis of sustainability claims that turn out not to be accurate. However, there is a real issue in pursuing those claims as it would be difficult to demonstrate causation and loss. The FCA’s increased scrutiny could assist with this in that companies having attracted regulatory criticism and having been required to pay fines could well lead to significant negative publicity, thereby causing a drop in share value. Shareholders would then have suffered a loss that is easier to quantify than it would be otherwise.

The message coming out of all this? Companies must ensure that their green disclosure is clear, up-front and fair, so as to mitigate the risk of regulatory intervention and litigation. The way the FCA will seek to enforce its proposed rules remains to be seen, but it is clear that companies who can demonstrate that they have taken steps to guarantee the credibility and accuracy of their statements and investments will limit their exposure to regulatory intervention and potential litigation.

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