FCA’s anti-greenwashing guidance comes into force next week. Lawyers explain what to expect

The Financial Conduct Authority (FCA)’s new anti-greenwashing guidance comes into force next week bringing EGS into the regulator’s focus. Lawyers explain to City A.M. what companies should expect from this and the implications if they mess up.

The regulator’s final non-handbook guidance on its anti-greenwashing rule comes into force on Friday 31 May 2024. This comes after a consultation on draft guidance which was published in November 2023, aiming to clarify the rule for firms.

The FCA’s aim is to build “transparency and trust” by introducing labels to help consumers navigate the market of sustainable investment products, in particular by ensuring the name reflects the sustainability profile of the product.

What are the rules?

Martin Cook, partner law firm Burges Salmon explained that all FCA-authorised firms will be required to make sustainability-related claims about their products or services. This is to ensure that those claims are consistent with the sustainability characteristics of the product or service and are fair, clear and not misleading.

He outlined that “the rule will apply to a broad range of communications and aims to create a level playing field for firms offering genuinely sustainable choices for their customers.”

“The rule is intended to complement and remain consistent with existing requirements on firms but does highlight the FCA’s focus on tackling greenwashing in the sector and positions sustainability as a priority area for FCA-authorised firms to concentrate on,” Cook added.

While Lucy Blake, partner at law firm Jenner & Block pointed out that in principle, that these new rules coming into force should be nothing new to regulated firms.

She noted that firms should already be aiming to make fair, clear and not misleading statements but now these “rule brings greenwashing very squarely into the FCA’s focus”.

What should businesses be careful of?

Blake suggested that businesses should avoid cherry-picking.

She explained that the FCA’s guidance requires firms to consider the ‘life cycle of a product or service, as appropriate, when making sustainability-related claims’. She stated that “firms should avoid cherry-picking information where they do not have a complete picture of the product’s life cycle and be specific about what they do and don’t know.”

“Transparency is critical in combating allegations of greenwashing,” she highlighted.

While Cook noted that firms should ensure that they can support any claims made with robust and credible evidence and consider any third-party data on which they rely.

“While this should not represent a major step change for firms given their existing regulatory obligations, firms will need to consider how they demonstrate compliance with the new rule,” he added.

What are the implications if rules aren’t followed accurately?

“The FCA will take action against firms where it has reason to believe that there is risk of consumer harm or serious misconduct,” stated Blake.

She pointed out that breaching the anti-greenwashing rule could result in the FCA imposing fines, suspensions or even prohibitions.

So with the looming implementation date less than a week away, Cook has warned firms they should ensure that they have the necessary compliance processes in place and reviews completed before the end of this month to avoid inadvertently breaching the new anti-greenwashing rule.

However, bringing it back to the fact firms should have some sort of system in places already as consequences of greenwashing is not limited to the FCA.

Blake noted that “firms may also have to deal with other regulators in the UK, such as the Competition and Markets Authority (CMA) and the Advertising Standards Authority.”

Firms also even face the possibility of civil litigation or significant reputational damage as ESG-activism is on the rise in the England and Wales courts.

A report in February highlighted that nearly two thirds of UK business leaders are concerned that their ESG targets will put them at risk of litigation. Their fears aren’t unreasonable as a majority of litigation lawyers surveyed earlier this year stated that there will be an increase in environmental/ESG claims.

“Many companies find themselves walking a tightrope between greenwashing and greenhushing — damned for saying the wrong thing or damned for saying too little. The solution for companies caught in these crosshairs is honesty, transparency and a demonstrable commitment to positive change,” Blake added.