How firms can prepare for the anti-greenwashing rule

The Financial Conduct Authority (FCA) is expected to publish its policy statement on Sustainability Disclosure Requirements (SDR) for wealth, fund and asset managers in Q4 2023. See our previous articles outlining the FCA’s proposals here and on preparing for SDR implementation here.

The FCA’s draft proposals include a general “anti-greenwashing rule”, which applies to all FCA regulated firms, and comes into effect immediately on publication of the policy statement in Q4 2023. Greenwashing is already a regulatory priority and has been at the root of several significant fines for financial institutions in recent years. The introduction of an explicit requirement to ensure sustainability-related claims are substantiated provides firms with a good reason to kick the tyres on systems and controls to prevent greenwashing, to ensure that they are effective.

To comply with the anti-greenwashing rule, firms must ensure that references to the sustainability characteristics of a product or service are:

1) consistent with the sustainability profile of the product or service; and

2) clear, fair and not misleading

While these requirements are arguably implicit in the FCA’s principles, the Consumer Duty, and existing rules around client communications, introducing an explicit rule gives the FCA a stronger basis to challenge firms and take enforcement action.

Firms should take proactive steps to ensure compliance with the anti-greenwashing rule ahead of the publication of the policy statement. Firms should carry out and document a greenwashing assessment that includes the following areas of emphasis:

• Marketing materials and client communications: Assess if all marketing materials, offering documents and regulatory disclosures are accurate and consistent with the sustainability characteristics of products
• Public disclosures and firmwide commitments: Consider if sustainability-related publicly disclosed metrics and statements are accurate and any public commitments are substantiated with clear plans and actions
• Product governance and management: Assess if product approval and oversight processes ensure that the stated sustainability characteristics of products are clearly articulated and assessed
• Governance and oversight: Review whether there are appropriate governance arrangements and resources in place with clear roles and responsibilities for greenwashing risk management across relevant business functions
• Client reporting: Conduct a review of existing client reporting associated with sustainability to determine if it is accurate and enables investors to understand whether the sustainability objectives of the product have been met

The clarity and accuracy of client communications and reporting should be considered in the context of the Consumer Duty, which requires firms to ensure their client communications enable customers to understand their products and services and their key features and risks.

This review will help identify key exposures to greenwashing risk and potential breaches of the anti-greenwashing rule. Enabling firms to implement enhancements to relevant control frameworks and second line BAU oversight activities, as applicable.

With the recent publication of the International Sustainability Standards Board (ISSB) sustainability-related disclosure standards and a busy regulatory agenda with respect to ESG, it is clear that greenwashing will continue to be a priority for regulators.

If you need assistance with understanding and implementing the SDR requirements and anti-greenwashing rule, please get in touch.