Overview
Greenwashing remains at the top of enforcement agendas in 2024.
Marketing products and services as “green” and
“sustainable” is a common practice and seen as an
important way to attract the attention of environmentally conscious
customers. In 2023, the European Commission reported that 53% of
sustainability claims were misleading or vague, and 40% were
unsubstantiated. ‘Green claims’ are increasingly
scrutinized by regulatory authorities, activist shareholders and
NGOs. Incoming regulation, increased enforcement, and
climate-linked litigation mean greenwashing is a key concern for
companies across all sectors. There is growing awareness that many
corporate claims regarding positive environmental impacts,
sustainability and carbon-neutrality do not tell the whole story or
are simply inaccurate. In light of that growing awareness,
regulatory authorities are taking action to minimise greenwashing
and enhance consumer protection. Among these is the UK’s
Financial Conduct Authority (the “FCA”). In this article,
we take a detailed look at the FCA’s recently published
guidance for companies outlining how they can ensure they comply
with the authority’s new anti-greenwashing rule.
Background
The FCA’s anti-greenwashing rule (the “Rule”) is
due to come into effect on May 31, 2024, prompting the regulator to
publish industry
guidance aimed at assisting firms with compliance. The Rule
requires firms to ensure that any references to the sustainability
characteristics of a product or service are consistent, fair, clear
and not misleading. The Rule applies both when a firm communicates:
(i) with clients in the UK in relation to a product or service; and
(ii) a financial promotion (or approves a financial promotion for
communication) to a person in the UK.
In principle, the Rule should be familiar to most firms
authorised by the FCA since various sections of the FCA Handbook
already require firms to ensure that the information they
communicate is fair, clear and not misleading (see, for example,
the Principles for Businesses (PRIN)). Some firms will also be
familiar with greenwashing guidance published by other UK
authorities such as the Competition and Markets Authority’s
(the “CMA”) guidance on environmental claims, and the
Advertising Standards Authority’s (the “ASA”)
guidance. The FCA collaborated closely with both authorities to
ensure cohesion between the different frameworks.
Anti-Greenwashing Rule Guidance
The Guidance sets out what the effect of the Rule is in practice
and provides example scenarios of both non-compliance and good
practice. 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 life cycle of
the product or service; and - Fair and meaningful where
comparisons are made to other products or services.
Correct and capable of being substantiated
Sustainability-related claims should be factually correct and
should not exaggerate or overstate the environmental or social
impact that a product or service has. The FCA notes that claims can
also be misleading if they provide conflicting or contradictory
information. The relevant product or service should also live up to
the claims made and such claims should be supported with robust and
credible evidence.
Alongside ensuring that sustainability claims are true at the
outset, the FCA requires firms to regularly review their claims,
and any evidence that supports them, to ensure that the claims
remain true and the evidence remains relevant for as long as the
product or service is provided or offered. And firms should
consider whether making the underlying evidence of its claims
easily publicly available would be helpful.
Illustrative examples include a firm stating that one of its
funds is “fossil fuel free” but noting in its terms and
conditions that the fund includes investments in companies involved
in the production, selling, and distribution of fossil fuels where
the company’s revenue earned from those activities is below a
certain threshold.
Clear and presented in a way that can be
understood
The FCA requires all firms to ensure that sustainability claims
they make are transparent and straightforward. The meaning of all
the terms used should be easily understood by the intended
audience. The Guidance warns that the use of broad terms or general
statements can be unclear and confusing and the firms should not
use terms that might imply that a product or service has
sustainability characteristics that it does not have.
Importantly, the FCA highlights that firms should exercise
caution in the way that it uses images, logos and colours and the
overall impression that a visual presentation of a claim can
create. Claims that are factually correct but presented in a way
that visually conveys a different impression could be deemed
unclear. For example, the FCA describes a webpage of a firm
outlining its savings accounts products, which contains a large
image of a rainforest, a text overlay of “Sustainable
Savings” but only one of the several savings account products
listed uses deposits to lend to companies to fund sustainable
projects, while its other savings accounts do not. This is a theme
echoed in other similar greenwashing and consumer protection
frameworks such as the
CMA’s guidelines.
Complete – claims should not omit or hide important
information
The sustainability claim made by a firm should be representative
of the product or service and firms should not omit or hide
important information that would influence a consumer’s
decision-making. This includes where the claim may be subject to
certain conditions that should be stated clearly and prominently.
The way a claim is presented should be balanced and positive
sustainability impacts should not be used to distract from other
aspects that may have a negative impact on sustainability.
The FCA also requires firms to base their claims on the full
life cycle of a product or service or, alternatively, be clear
about which aspect of the life cycle the claim relates to
specifically. Firms should not, however, cherry-pick information as
this would also contravene the Rule.
For example, the FCA notes that where a firm promotes a bond and
claims that it is used to finance a range of sustainability
projects, such as renewable energy, but fails to note that eligible
activities also include projects that improve the energy efficiency
of fossil fuel energy production but distribution would be
non-compliant.
Comparisons should be fair and meaningful
Whether comparing a product or service to a previous version or
to a competitor’s offering, comparisons should be fair and
meaningful such that the audience is able to make an informed
choice. Aspects of the comparison, such as what is being compared,
and how the comparison is being made, should be made clear. Firms
should be wary of making sustainability claims about a particular
characteristic that is simply meeting a minimum standard of
compliance with existing legal requirements. While true, the FCA
says that such claims could incorrectly give the impression that
the product or service is superior to others available.
Enforcement Powers
The FCA utilises a wide range of criminal, civil and regulatory
enforcement powers for non-compliance. These include imposing
financial penalties, prohibiting individuals from carrying out
regulatory activities, public censure and prosecution.
Wider sustainability-related measures
Preventing greenwashing is a key priority for the FCA and will
not only protect consumers and allow them to make informed
decisions, but will also foster a fairer market for businesses that
are making genuine sustainability claims about their products and
services. The adoption of the Rule is part of a wider package of
measures introduced by the FCA in November 2023 through its
statement on Sustainability Disclosure Requirements (the
“SDR”) and investment labels (PS23/16).
The wider package of measures includes: (i) naming and marketing
rules for investment products to ensure that the use of
sustainability-related terms are accurate; (ii) four labels to help
consumers navigate the investment product landscape; (iii)
consumer-facing information to provide consumers with more
accessible information to help understand key sustainability
features of a product; (iv) detailed information targeted at
institutional investors and consumers seeking more information in
pre-contractual, ongoing product-level and entity-level
disclosures; and (v) requirements for distributors to ensure that
product-level information (including the labels) is made available
to consumers.
Multi-jurisdictional Compliance
Although the FCA is working closely with the CMA and the ASA to
ensure that greenwashing guidelines for UK businesses are
consistent, firms operating in both the UK and the EU or the U.S.
will need to consider compliance under all applicable regimes. For
example, the EU is taking several
anti-greenwashing measures as part of the EU Green Deal
including the implementation of the new Directive on Empowering
Consumers for the Green Transition, a law banning exaggerated and
unfounded claims relating to a company’s environmentally
friendly actions, including carbon neutral claims. In the U.S., the
Federal Trade Commission announced that it is
seeking public comment on potential revisions to its Green
Guides for the Use of Environmental Marketing Claims, in particular
to address carbon offsets and climate change-related marketing
claims. The Securities and Exchange Commission (the
“SEC”) adopted amendments to the Investment Company Act
1940 to include the “
Names Rule,” which regulates appropriate naming of funds
to ensure that they do not mislead investors regarding the
fund’s risks and investment characteristics. The Names Rule is
consistent with the SEC’s overall focus on ESG issues,
including, as we have noted previously, the formation of the
ESG Task Force within the Division of Enforcement “to
develop initiatives to proactively identify ESG-related misconduct
consistent with increased investor reliance on climate and
ESG-related disclosure and investment.” The SEC has been the
subject of scrutiny recently since it announced that it would adopt
a scaled back set of emissions disclosure requirements for public
companies, as we discussed
previously.
Conclusion
Greenwashing is a recurring theme across all sectors, and
although the facts and the context differ in each case, the message
remains that sustainability claims must be clear, accurate and
capable of being substantiated. The Rule, and indeed the wider
package of measures set to be implemented by the FCA, will require
firms to undertake a detailed review of their financial promotion
and marketing frameworks. For products and services that have
sustainability claims made about them, firms will need to conduct a
gap analysis to identify whether, come May 31, they would be in
compliance with the Rule. As with all significant new regulatory
measures, firms should also review existing policies and
procedures, as well as external communication platforms such as
websites and other marketing materials.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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