What is the FCA’s new Anti-Greenwashing Rule and how does it apply?

With ESG and sustainability becoming increasingly important themes, both within financial services and in the wider economy, it is unsurprising that the Financial Conduct Authority (FCA), like other regulators, has been seeking to implement an appropriate regulatory framework.

In November 2023, the FCA confirmed that it would be introducing various measures relating to sustainability disclosures, including a new set of labels for investment funds, as well as a new ‘Anti-Greenwashing’ (AGW) Rule. The AGW rule is the first to come into force, taking effect from 31^st May 2024, and is also the broadest in scope, applying to all FCA-regulated firms.

In this article, Nigel Sydenham discusses greenwashing; what it is, why regulators are enforcing a new Anti-Greenwashing Rule, and what firms should consider to ensure they comply.

Whilst there is no official definition of greenwashing, it relates to the risk that firms, in seeking to attract consumers who have a preference for sustainable products, may make claims which are exaggerated, misleading, or unsubstantiated. The real characteristics of a product or service are disguised using inaccurate claims which present the product or service as more sustainable than it is.

For the FCA, tackling greenwashing addresses two related issues:

• It allows consumers to make informed decisions – those that wish to choose sustainable products and services will be able to do so with confidence.
• It helps to ensure a level playing field for firms, since claims about sustainability will have to reflect the genuine underlying reality, not simply marketing hype.

So, what is the new rule, and how does it apply? The AGW rule is found in the FCA Handbook, specifically in the Environmental, Social and Governance (ESG) Sourcebook (ESG 4.3.1R). It states:

“A firm must ensure that any reference to the sustainability characteristics of a product or service is: consistent with the sustainability characteristics of the product or service, and is fair, clear and not misleading”.

Crucially, the rule applies not only to investment funds (the subject of the bulk of the FCA’s package of measures) but to any reference to the sustainability characteristics of a product or service. This makes it potentially relevant to every FCA-regulated firm.

It’s important to recognise that, rather than being completely new, the AGW rule builds on existing obligations. Indeed, as the FCA comments in its Finalised Guidance (FG24/3), its rules “already require most firms to ensure the information they communicate is fair, clear and not misleading”.

As a result, the rule is perhaps best understood as clarifying a firm’s existing obligations. In essence, by introducing the rule, and its associated guidance, the FCA is making clear not only that its existing rules also apply to sustainability claims, but also the regulator’s specific expectations regarding such claims.

What, then, does the FCA expect when a firm makes a claim about the sustainability of a product or service? The FCA guidance states that to comply with the new rule, all 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
• Comparisons to other products or services are fair and meaningful

The guidance provides examples of both good and poor practice, although it’s important to recognise that these are illustrative, rather than a comprehensive guide to every possible context in which the rule applies. As a result, while the examples are helpful, firms will need to focus on applying the 4C’s (correct, clear, complete and fair and meaningful comparisons) to their own communications.  

Whilst the FCA only published its finalised guidance in April 2024, many firms will have been working on their response to the AGW rule since its introduction was confirmed in 2023.

However, any firm that has not yet completed (or even started) work on this has three urgent tasks:

1. Understand the scale of the challenge. Firms need to familiarise themselves with the rule and associated guidance and conduct a scoping exercise to consider the likely impact on the firm. For some firms, sustainability is a key component of their marketing strategy, whereas for others any reference to sustainability in their communications may be incidental (and possibly even accidental).
2. Review (and revise) existing communications. Firms need to review their existing communications and assess the content against the 4C’s listed above. The scale of this task will, of course, vary enormously depending on the outcome of their scoping exercise. In some cases a few minor tweaks to content may be sufficient – in other cases, full re-writes will be required.
3. Ensure that relevant staff understand the rule, and the FCA’s expectations. Firms need to consider how best to communicate the AGW rule, and its implications, to all employees involved in the creation, and review, of communications. This is likely to include changes to internal procedures, as well as appropriate staff training.

It’s important to remember that the AGW rule is only the first element of a package of measures – the other elements, which focus on sustainable investments, take effect in stages, beginning at the end of July 2024. Firms which are within scope of these additional rules need to ensure that they understand the FCA’s expectations and their impact.

If you or your firm require further training regarding ESG and the new Anti-Greenwashing Rule, get in touch and learn more about our tailored eLearning modules or in-house courses for your front and back office staff, the Compliance Team, and Senior Management.

Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.

He is a CFA Charterholder and Chartered Fellow of the CISI, with over 20 years' of industry experience.

With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.

Recent assignments have included briefing multiple boards and executive teams on the Consumer Duty, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.