SDR: Finalised Guidance On The Anti-greenwashing Rule

Key points:

• The finalised guidance complements the anti-greenwashing rule – both will apply toall FCA authorised firms (i.e. not just investment managers) from31 May 2024. The FCA rejected calls to delay the implementation of the guidance for six months.
• Firms must have an evidential basis for any claims relating to environmental and/or social characteristics in their communications to UK clients and be able to substantiate such claims on an ongoing basis.
• The anti-greenwashing rule will apply on a proportional basis such that communications directed at UK retail investors will be subject to different standards than those directed at professional investors (consistent with existing FCA rules in COBS).
• Firms communicating to UK retail clients must meet their existing Consumer Duty obligations and will therefore need to test that communications are likely to be understood by clients and meet their information needs. Investment managers with retailisation platforms may need to bear this in mind.

Introduction

On 23 April 2024, the FCA published FG24/3, its finalised non-handbook guidance on the new "anti-greenwashing rule" which was introduced as part of the package of measures establishing the Sustainability Disclosure Requirements (SDR) regime (which we covered here). The guidance, like the rule itself, will apply from 31 May 2024 – in just over a month's time.

The finalised guidance, which follows a previous guidance consultation (GC23/3) launched in November 2023, is intended to help firms understand the FCA's expectations under the anti-greenwashing rule and provides examples as tohow to implement the rule in practice.

The finalised guidance is largely consistent with the FCA's initial proposals in its consultation guidance but additional detail has been provided in a number of areas, including in the examples and the scope of application. In many cases, this reflects requests for further clarity from industry associations.

There are a number of important points that firms will need to consider and we set these out in further detail below.

The anti-greenwashing rule

Under the anti-greenwashing rule in ESG 4.3.1R, which will apply from 31 May 2024, all communications an authorised firm makes to UK persons about the 'sustainability' characteristics of its financial products and services must be:

• consistent with the sustainability characteristics of their financial product or service; and
• fair, clear, and not misleading.

The rule will apply:

• to all firms, regardless of:
  
  • whether or not they are covered by other aspects of the FCA's Sustainability Disclosure Requirements (which currently apply to firms managing a UK UCITS or UK AIF); and
  • the client categorisation of UK investors.
• in respect of all communications (including financial promotions communicated by the firm) about financial products or services where they refer to environmental and/or social characteristics - this will therefore capture not only marketing documents (such as teasers, marketing decks or private placement memorandums) but also, for example, periodic ESG reports and in-person communications.
• to the approval of financial promotions by unauthorised persons for communication in the UK (now significantly limited by the financial promotion gateway).

The anti-greenwashing rule complements existing rules in the FCA Handbook that provide that communications to clients should be fair, clear and not misleading (in PRIN 2.1, COBS 4.2 and CONC 3.3). It is therefore not a substitute for, nor does it override, those rules, although, together with the finalised guidance, it evidently clarifies the regulator's specific expectations as regards sustainability-related claims.

Much of the ESG module in the FCA Handbook is, in practice, of greatest relevance to the asset management sector, and many of the examples given in the guidance reflect this. However, as mentioned above, ESG 4.3.1R will apply to all regulated firms making any kind of claims about the sustainability characteristics of their product or service. This means that the guidance remains a useful insight into the FCA's perspective on sustainability claims and would, for example, assist a fintech firm that describes itself as helping customers reduce the environmental impact of their choice of financial services (or other) providers, or a firm marketing a product with an avowedly social purpose (such as financial inclusion, potentially).

The finalised guidance – the headline expectations

Broadly, the FCA expects that any 'sustainability'-related claim or reference in relevant material should:

• becorrect and capable of being substantiated (i.e., factually correct, not overstated or exaggerated);
• be clear and presented in a way that can be understood (i.e., transparent and straightforward; technical terms should be explained);
• be complete – they should not omit or hide important information that might influence decision-making (i.e. it should convey a representative picture of the product or service); and
• be fair and meaningful in relation to any comparisons to other products or services (i.e. it should enable the communication's audience to make informed choices).

Points of note

Using the above key expectations as headings, the guidance proceeds to set out further details as to regulatory expectations, with eight non-exhaustive illustrative examples intended to demonstrate both good and poor practice. These examples have been amended and expanded upon in response to lobbying from the industry, including comments from the BVCA and CLLS to which we contributed. Some of the points of note that emerge from this section of the guidance include:

• The importance of evidence and review: As part of ensuring that claims are correct and capable of being substantiated, the FCA has highlighted the importance of firms regularly reviewing their claims and any supporting evidence. Firms must further ensure such evidence is relevant for the duration of the claim it relates to – in other words, for as long as those claims are still being communicated to investors (for instance, for as long as a relevant financial promotion is live). Whilst not mandated specifically, this suggests the FCA not only expects firms to be able to evidentially verify their claims on an ongoing basis but also to be able to point to the policies and procedures underlying this. For example, where a manager prominently displays a claim that all investments are reviewed for sustainability characteristics, the FCA would expect the manager to be able to demonstrate how this is done in practice alongside how such review is incorporated into the decision-making process. The guidance does suggest that where a firm's claim makes specific reference to the evidence that supports it, it should consider whether it should make that evidence publicly available, although the feedback statement does add that firms may determine that it is not appropriate to do so.
• Proportionality and professional clients: The FCA has responded to industry calls for proportionality and confirmed that firms do not need to include the same information, nor present information in the same way, in communications to professional clients as they would for retail clients. This welcome clarification is consistent with the FCA's existing approach to proportionality for communications under the COBS rules. This is not an exemption, but it does allow firms to calibrate their compliance and will be helpful for those firms with professional-only investors.
• The Consumer Duty: Importantly, the guidance reiterates that firms communicating to retail clients must meet their existing Consumer Duty obligation. Firms must therefore test that communications are likely to be understood by retail clients and meet their information needs. It is likely that supervision of communications to retail clients will be subject to higher standards and greater regulatory scrutiny. The guidance specifically points to the FCA's qualitative consumer research on SDR and investment labels, which influenced the final rules and which includes some considerations for asset management firms.
• Use of images: Whilst the guidance does not extend generally to the use of images, logos and colour in contexts not intended to refer to, or describe, the sustainability characteristics of a product or service, one of the examples refers to the situation where a firm does use a sustainability-related image: in these circumstances, the image should be consistent with the sustainability characteristics of the given product or service.
• Ensuring that claims are complete: Firms should consider what information is necessary to include to give a representative picture of the product or service (and should not intentionally omit information that might influence an investor's decision-making).

Next steps

With 31 May 2024 fast approaching, firms should review their investor communications as appropriate to ensure compliance with the anti-greenwashing rule and guidance, and should ensure that existing measures taken to substantiate claims are documented in their policies and procedures and are sufficient.

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.