FCAs Greenwashing proposals - new rule on consistency with sustainability profile

The FCA has this week published its much awaited proposals on the UK sustainability disclosure requirements (SDRs). While our financial regulatory colleagues have produced an in-depth briefing summarising the proposals for sustainability labels and corresponding disclosure requirements (found here), it was a rule buried in chapter 6 that caught our eye.

The FCA is introducing a new requirement in the ESG Sourcebook (ESG 3.3.1R) that all regulated firms (irrespective of whether they are conducting business that is in scope of the SDRs) must ensure that any reference to the "sustainability characteristics" of a product or service is: (i) consistent with the sustainability profile of the product or service and (ii) clear, fair and not misleading.

A couple of points to note:

• sustainability characteristics are defined as "environmental, social or governance characteristics" which, if the past few years have shown, can mean all things to all wo/men and is not a particularly helpful defined term;
• arguably we don't need this additional rule because we already have the clear, fair and not misleading rule in Principle 7 and COBS 4.2.1  so what's the point?
• what does "sustainability profile" mean anyway? This term isn't defined and is going to lead to some serious head scratching at firms.

Taking these issues together, what's the point of introducing such a new rule? Well a couple of thoughts.

Greenwashing is a clear focus for regulators from all angles. We saw last week the ruling from the Advertising Standard Agency against HSBC's bus-stop posters highlighting HSBC's efforts against climate change, which were ruled to have omitted material information and were therefore misleading. The FCA's new addition highlights its own scrutiny of firms' efforts in this area. It follows a "Dear Chair" letter to Authorised Fund Managers last year, which noted the FCA's concerns over the number of 'poor-quality fund applications' that fell below the FCA's expectations regarding claims around sustainability. The new rule introduced by the FCA highlights that this should be a particular focus for firms.

Second, it also provides the FCA with a much clearer rules-based route to enforcement (even if, arguably, they had the right already). This codification of expectations on firms is likely to give more impetus to the FCA's enforcement team where they do see inconsistencies between what firms are saying and what firms are doing with respect to sustainability.

Finally, taken together, it is hoped that this does not dampen firms' enthusiasm in promoting their efforts on sustainability. 'Greenhushing' is a term that is on the rise and this might become the unintended consequence for industry. Certainly our work helping clients with greenwashing risk assessments of product documentation and climate litigation training to boards are directed at enabling firms to mitigate the increasing risk in this area.

The new rule will come into effect immediately on the FCA publishing its Policy Statement (due in H1 2023). This means that firms will need to be ready when this comes in. Firms would therefore do well to take action now, upskill their marketing teams and ensure that greenwashing risks are well understood by the board.

Authors: Lynn Dunne, Partner, Lorraine Johnston, Partner, David Capps, Senior Consultant and Anna Varga, Senior Associate