Follow us

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:

  • communicates with a client in the UK in relation to a product or service; or
  • communicates a financial promotion to, or approves a financial promotion for communication to, a person in the UK,

to 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.

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:

  • correct and capable of being substantiated;
  • clear and presented in a way that can be understood;
  • complete; and
  • fair and meaningful in relation to any comparisons to other products or services.

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:

  • In respect of communications to clients/persons in the UK.
  • Non-UK entities with UK branches are also within scope (given that the legal entity will be deemed UK authorised on account of its branch authorisation) for any communications made by the non-UK entity to UK persons/clients.
  • Overseas branches of UK authorised firms - this is one of the areas of uncertainty – i.e. whether the AGR applies to a firm's overseas branch network. The extent to which the territorial scope of the AGR and COBS (and in particular COBS 4) align is not entirely clear. As it stands, the AGR appears to have a different territorial scope to COBS, but there are some suggestions that this is not the FCA's intended approach. One to monitor.
  • Although non-UK manufacturers are not within scope of the new rule, they could be affected indirectly, for example if in-scope distributor firms impose demands on them (eg requiring additional information or evidence) to help with their own compliance with the new rule.

Communications to clients/persons:

  • Applies to all communications which make sustainability claims to clients – “client” includes potential client, an investor, potential investors and a person to whom a firm provides, intends to provide or has provided a service in the course of carrying on a regulated activity.
  • Where the communication is a financial promotion, the scope is even wider as the end user could be any person, and not necessarily a client or potential client.

Retail and wholesale clients:

  • The AGR applies to communications and financial promotions to both retail and wholesale clients.
  • However, the final guidance embeds a degree of proportionality so that the information firms provide, and the way they present the information, can be adapted depending on whether the recipient is a professional or a retail client.
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:

  • The communication must be in relation to a "product or service" – not defined.
  • Both the firm's own products and services, as well as those of third-party providers, appear to be within scope.
  • One of the areas of uncertainty in the draft AGR had been whether the AGR extends to unregulated products and services provided by authorised firms. Firms will need to decide whether it is prudent to extend AGR to their unregulated products and services.

Firm-level disclosures:

  • The final guidance confirms (as did the draft) that statements about the firm itself (rather than its products and services) are not in scope of the AGR; although the FCA reminds firms that entity-level statements are subject to PRIN, Consumer Duty, COBS 4, ASA and CMA Codes (amongst others).
  • That helpful clarification is somewhat muddied by guidance that firms need to consider whether entity-level claims and disclosures may from part of the ‘representative picture’ of a product or service in a decision‑making process.
  • Given that there is little guidance on how to assess entity-level statements for the purpose of "representative picture" or for compliance with COBS, PRIN, Consumer Duty etc, firms may need to consider whether it is prudent to have regard to the AGR when it comes to  entity-level statements even if not directly applicable; though firms that are subject to EU entity-level disclosure requirements (eg under CSRD or SFDR) may already have robust controls in place for entity-level disclosures.

COBS exemptions:

  • One key area of uncertainty is to what extent the AGR is intended to override existing exemptions under COBS and the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. We saw above the point on territorial scope already, but how about existing exemptions?
  • In the final version of the guidance, the FCA stated that the AGR is intended to complement and be consistent with and not override rules that impose the fair, clear and not misleading standard (essentially COBS and PRIN) and a trade association has obtained informal confirmation from the FCA that existing exemptions continue to apply.
  • This is helpful, in particular for primary markets businesses where there was concern of the impact the AGR may have on promotions that the firm may make or pass through. Formal guidance from the FCA would nevertheless be helpful.

Third-party information or products:

  • Where firms rely on third parties for information and pass that on (eg data, research, analytical resources, indices, benchmarks) or where they make claims about third parties' products, a key consideration is the degree to which firms can rely on such third-party information/communications and to what extent they should undertake due diligence of these.
  • The due diligence burden could be minimised for certain issuers/manufacturers; but this will remain a key area of uncertainty and firms should continue to review their approach as the AGR beds down and industry best practice and regulator's expectations develop.

Past communications:

  • Firms will need to decide how they deal with existing materials which refer to the sustainability characteristics of a product or service. Those that may be used or referred to by the market or which continue to be current will need particular attention.

 

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.

 

Marina Reason photo

Marina Reason

Partner, London

Marina Reason
Clive Cunningham photo

Clive Cunningham

Partner, London

Clive Cunningham
Kelesi Blundell photo

Kelesi Blundell

Partner, London

Kelesi Blundell
Patricia Horton photo

Patricia Horton

Professional Support Lawyer, London

Patricia Horton
Chris Hurn photo

Chris Hurn

Senior Associate, London

Chris Hurn
Heike Schmitz photo

Heike Schmitz

Partner, Co-Head ESG EMEA, Germany

Heike Schmitz
Shantanu Naravane photo

Shantanu Naravane

Partner, London

Shantanu Naravane

Key contacts

Marina Reason photo

Marina Reason

Partner, London

Marina Reason
Clive Cunningham photo

Clive Cunningham

Partner, London

Clive Cunningham
Kelesi Blundell photo

Kelesi Blundell

Partner, London

Kelesi Blundell
Patricia Horton photo

Patricia Horton

Professional Support Lawyer, London

Patricia Horton
Chris Hurn photo

Chris Hurn

Senior Associate, London

Chris Hurn
Heike Schmitz photo

Heike Schmitz

Partner, Co-Head ESG EMEA, Germany

Heike Schmitz
Shantanu Naravane photo

Shantanu Naravane

Partner, London

Shantanu Naravane
Marina Reason Clive Cunningham Kelesi Blundell Patricia Horton Chris Hurn Heike Schmitz Shantanu Naravane