The FCA's new anti-greenwashing rule and guidance (AGR) will come into force on 31 May 2024. Tackling greenwashing is a priority for the FCA. The AGR was introduced as part of a package of measures designed to inform and protect consumers and improve trust in the market for sustainable investments (see our briefing here on the FCA's final rules on SDR and investment labels (PS23/16)).
With a couple of weeks left to ensure that firms are compliant with the AGR, what are the key elements that firms need to be thinking about, in particular given that there are still uncertainties as to the scope of the rule? We have set out below key scoping considerations.
What? |
The AGR is set out in a new Chapter 4.3 of the Environmental, Social and Governance sourcebook (ESG) in the FCA Handbook. The new rule (ESG 4.3.1R) will require any firm that:
to ensure that any reference to the sustainability characteristics of a product or service is:
The finalised non-handbook guidance on the anti-greenwashing rule (FG24/3) provides further colour on what is expected of firms and also how the anti-greenwashing rule interacts with other requirements such as the Consumer Duty, the financial promotion rules in COBS 4, and the FCA's Principles for Businesses (PRIN). As set out in the guidance, the FCA expects firms to ensure that any communications they make which include sustainability-related claims must be:
Reaffirms and clarifies existing requirements: The FCA sees the AGR as a mere clarification of existing obligations on firms under the Consumer Duty, PRIN and COBS 4 which already impose a "fair, clear and not misleading" standard to communications. In addition, other regulatory bodies in the UK, such as the Advertising Standards Authority (ASA) and the Competition Markets Authority (CMA), already have guidance on greenwashing and green claims. The FCA has collaborated with the CMA and ASA to ensure that its guidance is consistent with theirs. |
Who and where? | The AGR applies to:
UK authorised firms:
Communications to clients/persons:
Retail and wholesale clients:
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How? | Types of communications: The AGR applies to all types of communications including statements, assertions, strategies, targets, policies, information as well as images. Implementing AGR in respect of images raises its own challenges.
Sustainability characteristics: The communication must be in relation to the sustainability characteristics of a product or service. 'Sustainability characteristic' is defined as environmental or social characteristics, so both greenwashing and social washing are within scope. (The 'G' of ESG – governance – is not covered as the FCA considers governance to be an enabler of environmental and/or social outcomes, rather than an end in itself.) Financial Products and Services:
Firm-level disclosures:
COBS exemptions:
Third-party information or products:
Past communications:
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Why is the AGR important?
Enforcement | The FCA is likely to be very focussed on greenwashing and where there is increased regulatory focus and scrutiny, enforcement action may follow.
Whilst the FCA already has tools in its existing arsenal to pursue those who commit greenwashing (for example under the financial promotions rules), the new rule provides an explicit and specific sustainability-focused hook for enforcement. During the design stage of its sustainability disclosure requirements (SDR) and investment labels rules last year, the FCA indicated that it would not want to 'go straight for the stick' by handing out large penalties for greenwashing immediately. But, one year on and with the AGR about to apply from 31 May, we expect the FCA to take a harder line now. |
Private right of action | Aside from the risk of FCA enforcement, once the anti-greenwashing rule starts to apply, firms may also be open to private rights of action under section 138D of the Financial Services and Markets Act 2000 from persons who suffer loss as a result of a breach.
COBS provides a 'reasonable steps' defence to an action for damages in relation to the 'the fair, clear and not misleading' rule but there is a question on whether it applies to the AGR. As noted above, the FCA has anecdotally confirmed that exemptions under COBS are not overridden by the AGR and, therefore, perhaps this defence applies. One to watch. |
International regulatory push | Global businesses need to monitor international developments.
Greenwashing fines and rulings, and regulatory initiatives, are emerging in other jurisdictions. There have been well publicised regulatory fines and court rulings in the US and Australia. In addition, regulators globally are considering their approach to greenwashing rules and guidance. We are seeing this in the US and the EU, so the global landscape is complex and fragmented and will need to be monitored. |
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Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.