New rule will come into effect from 31 May 2024 – what should firms be doing to prepare?

There is a huge market for sustainable investment products, resulting in a growing number of products marketed as such. As this demand grows, so does the risk of "greenwashing", a practice on which European regulators, including the UK's Financial Conduct Authority (FCA), have increasingly focused.

In November 2023, the FCA implemented the Sustainability Disclosure Requirements (SDR) regime. This regime includes a new anti-greenwashing rule, due to take effect from 31 May 2024. What can firms do to ensure they will be compliant with the new requirements, and what indication has the FCA given in its guidance as to its regulatory approach?

Improving transparency

The SDR regime primarily sets out to improve the transparency of sustainable investment products and minimise greenwashing, allowing consumers to trust sustainability claims. It aims to do this through the regulation of product labels and naming and marketing requirements. For example, UK asset managers may only use sustainability-related terms if certain conditions are met.

The anti-greenwashing rule has a broader scope. It applies to all regulated firms that make any sort of sustainability claim about products or services in any form of customer communication. "Customer" captures both retail and business customers.

Under the anti-greenwashing rule, firms will be required to ensure that sustainability-related claims made about financial products or services are "fair, clear, and not misleading, and consistent with the sustainability profile of the product or service". The new rule is contained in the FCA's Environmental, Social and Governance sourcebook (ESG), in particular, in ESG 4.3.1.

This rule will be supported by guidance issued by the FCA, on which it has recently consulted.

FCA's proposed guidance

The proposed guidance is designed to help firms better understand the FCA's expectations under the anti-greenwashing rule and other existing, associated requirements.

The key aspect of the guidance will be a requirement for sustainability references to be:

Correct and capable of being substantiated

The firm should not state or imply features of a product/service that are not true, and it should not exaggerate any sustainability features. Statements should be substantiated and firms should consider if they have appropriate evidence and if the evidence should be made public.

Clear and presented in a way that can be understood

Sustainability claims should be transparent and straightforward. Terms used should not be vague, broad, generic or technical. The overall impression is also important, including images, logos and colours that can imply sustainability even if the statements themselves are not making such claims.

Complete and not omit, or hide, important information

References should consider the full life cycle of the product or service, and conditions and caveats should be prominent.

Fair and meaningful in relation to any comparisons to other products or services

Comparative statements (against competitors or industry) should be fair, meaningful and substantiated.

Outcomes-focused guidance

The FCA's guidance is outcomes-focused and it will be left to firms to build policies and procedures around this.

It expressly refers to the fact that it is intended to be consistent with guidance published by the Advertising Standards Authority (ASA), the UK's independent advertising regulator, and the Competition and Markets Authority (CMA), which has launched two sector investigations scrutinising potential greenwashing in the fast fashion retail and fast-moving consumer goods (FMCG) sectors. As such, firms should look to these more mature regimes when considering how best to ensure compliance with the FCA's anti-greenwashing rule.

Seven tips to ensure sustainability claims are compliant

In line with the guidance received to date from the ASA and CMA, and the main themes from ASA greenwashing adjudications over the last year or more, any regulated business should consider the following seven tips when crafting its sustainability-related claims and checking the substantiation behind them:

  1. Proportionality is key – any sustainability advantages referenced in a claim should be proportionate to the environmental impact of business activities as a whole.
  2. Broad, sweeping environmental claims should be avoided (such as "eco-friendly", "sustainable" and "green"), in favour of more precise, direct claims about a particular green advantage that is well-documented and easy to prove.
  3. Language used must always be clear and precise – if not, a regulator will interpret a claim as a consumer is likely to do so, not as the business intended it to be understood.
  4. Corporate environmental goals and mission statements need to be evidenced too – with clear timetables and objectives for the business to achieve the goals promoted, and with progress being regularly tracked and documented.
  5. Consider the whole life cycle and the overall environmental picture of the product/service/business the claim relates to. If the statement does not apply to the whole life cycle, expressly set out any exclusions.
  6. Material information which enables a consumer to understand a green claim being used should be included within the ad copy with the claim itself, not just referenced in small print or via a signposted hyperlink to a website.
  7. Ads will always be viewed as a whole, so colours, images of the natural environment and other content around the environmental claim will also be taken into consideration to assess how a consumer may understand it. What marketing content implies is as important as what it expressly states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.