Firms urged to review policies and processes as FCA issues anti-greenwashing guidance

The FCA recently published its guidance (23 pages / 393 KB) ahead on the new anti-greenwashing rule coming into effect on 31 May. From this date, businesses will be required to ensure sustainability claims are backed up by robust, relevant, and credible evidence.

Hayden Morgan, sustainable finance expert at Pinsent Masons said: “Firms should integrate greenwashing risk within existing governance frameworks and align this to the sustainability characteristics of the firm’s products and services. As part of this framework, prudent firms should set a greenwashing risk appetite, which equates to the amount of risk exposure the firm is willing to take. Any processes or policies introduced should be practical, pragmatic, and operationally focused.”

Regulators around the world are taking action to prevent and investigate so-called greenwashing in markets. In the UK, the FCA introduced a package of measures in November 2023, with the financial services regulator now publishing guidance to support the implementation of its anti-greenwashing rule.

Greenwashing can occur across most of a business’ functions, interfacing with organisational operations, activities, products and services. Recent enforcement actions brought by regulators “emphasise failures within internal process, behaviour and conduct, mostly inadvertently”, said Morgan.

The FCA guidance comes as there continues to be “an increasing retail and institutional investor interest in sustainable products and services”, said Morgan.

In the financial services context, greenwashing can occur when investors are exposed to potentially misleading claims made regarding the sustainability credentials and performance of products and services. As a consequence, asset managers, for example, will then potentially be exposed to increased regulatory intervention, claims for mis-selling and litigation.

“This risks a decrease of investment in sustainable assets as an asset class, having direct implications in terms of the investment required to meet our global net zero and sustainability goals,” Morgan said.

The effect of the anti-greenwashing rule means that all FCA-authorised firms need to ensure claims are correct and are capable of being proven. The guidance also states that any sustainability claims should be clear and presented in a way that can be understood easily by investors and consumers. Claims should also be complete, without omitting or hiding any important information about the product or service. Firms are required to ensure any comparisons made within their claims are fair and meaningful.

“Legal and compliance teams, in particular, should consider the implications of this new rule and how to take action to prevent non-compliance. Although the FCA’s guidance includes some useful examples covering financial products, the examples fail to address the diverse nature of sustainable business activities in the financial services sector. In particular the FCA has offered little guidance covering services such as portfolio management and investment advice, which undermines business confidence - a notable gap given the rule itself has potentially significant implications,” said James Hay, sustainable finance expert at Pinsent Masons.

“Nonetheless, this does represent a major step forward as the FCA is the first major regulator to issue specific guidance on greenwashing, supporting confidence in the growing sustainable finance market,” said Morgan.

Businesses should include evidence to back up sustainability claims. The guidance states that any supporting evidence must be robust and relevant. Any supporting evidence should also be regularly reviewed, with public availability and accessibility considered.

Firms should also ensure that any policies linked to sustainability are communicated to customers and potential investors, reviewing any existing or future claims against the FCA guidance.