On 25 January 2023, the consultation period closed on the Financial Conduct Authority (FCA)’s paper on Sustainability Disclosure Requirements (SDR) and investment labels (CP22/20). This paper contains proposals designed to increase transparency on the sustainability profile of products and firms, directly addressing the growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability‑related claims about their products – known as ‘greenwashing’.
In line with the proposals, as of 30 June 2023 the FCA will have a new explicit rule upon which to challenge firms and bring enforcement action where it considers them to be greenwashing their products or services.
Overview of the proposed SDR rules
The FCA aim in the consultation paper is to set “a high bar for products that make sustainability claims, which is important to help clamp down on greenwashing against a backdrop of trust concerns in contrast to the EU and US regimes, where the starting point has been to categorise products principally to determine disclosure requirements”. The proposals are extensive and far-reaching, but there is a sensible period for implementation.
- 30 June 2023: General anti-greenwashing rule applies to all regulated firms
- 30 June 2024: Labelling, naming and marketing rules, consumer‑facing and pre‑contractual disclosure requirements and rules for distributors take effect
- 30 June 2025: The first ongoing sustainability performance‑related disclosures and entity‑level disclosures in the sustainability entity report
The FCA’s proposals include:
- Sustainable investment labels
- Consumer‑facing disclosures
- Detailed disclosures
- Naming and marketing rules
- Requirements for distributors
- A general ‘anti‑greenwashing’ rule
The paper is primarily retail investor focused, but funds targeting institutional investors can opt to use the labels provided they meet the relevant criteria. Detailed disclosures – including pre-contractual disclosures, sustainability product reports and sustainability entity (or firm level) reports – are targeted at both retail and institutional investors. The level of adoption of the labels by institutional funds will depend on the level of credibility achieved with institutional investors by the SDR regime.
What is the anti-greenwashing rule?
The new anti-greenwashing rule will require firms to ensure that any reference to the sustainability characteristics of a product or service is:
- Consistent with the sustainability profile of the product or service
- Clear, fair and not misleading
While firms should already be ensuring the information they communicate to clients is clear, fair and not misleading under PRIN 2.1 Principle 7 and COBS 4.2.1, the rule will now be included in the ESG sourcebook (ESG 3.3.1R) and will link this obligation directly with sustainability disclosures – ensuring firms understand that this obligation applies when they are making any sustainability claims.
Is my firm subject to the anti-greenwashing rule?
Although the primary focus of the CP22/20 paper is protecting retail rather than institutional investors, the anti-greenwashing rule has a broader scope, applying to all FCA regulated firms, including FCA authorised firms approving financial promotions for unauthorised persons.
The rule applies to all sustainability-related claims in all client communications of all products and services and is not limited in application to communications with retail clients (unlike the naming and marketing rules). Therefore, it is likely to bring into scope the client communications such as websites and financial promotions of UK AIFMs, delegated MiFiD managers and fund advisors when the financial promotions are approved by an FCA authorised firm.
When does the anti-greenwashing rule come into force?
Following the paper’s publication on 25 October 2022, the consultation period closed on 25 January 2023. Next, the FCA will follow up with its Policy Statement by “mid 2023” and provisionally 30 June 2023. From the date of the statement, the FCA’s new anti-greenwashing rule will apply.
What needs to be done?
Firms should now be considering how to demonstrate compliance with the anti-greenwashing rule ahead of the looming 30 June 2023 deadline. The key challenge will be to assess if references in client communications are “consistent with the sustainability profile of the product or service” and are “proportionate and not exaggerated”, as this is a highly subjective, complex and nuanced judgement in most cases.
We recommend that firms document an anti-greenwashing assessment of their client communications in a structured and detailed way, in order to demonstrate to the regulator that they have approached compliance with the new rule in line with PRIN 2 “to conduct it business with due skill, care and diligence”.
Our recommended areas of focus include:
- Assessing client communications including websites, marketing materials, pitchbooks, mobile apps, fact-sheets, terms and conditions, offering documents
- Training marketing teams on the practical implications of the new rule
- Updating compliance manuals
- Reviewing fund approval processes
We also suggest that a key step in an anti-greenwashing assessment is to screen all client communications to identify the use of sustainability-related terms highlighted in the paper, i.e. ‘ESG’ (or ‘environmental’, ‘social’ or ‘governance’), ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, ‘responsible’, ‘green’, ‘SDG’ (sustainable development goals), ‘Paris‑aligned’ or ‘net zero’.
How IQ-EQ can help
To aid compliance with the new FCA rules and requirements, we at IQ-EQ have created pragmatic guidance and practical support materials to help our clients prepare for implementation, including tailored SDR training presentations and anti-greenwashing assessments of client communications.
If you’d like to discuss SDR and the proposed anti-greenwashing rule, or find out more about the support available from IQ-EQ’s expert compliance consulting and technical regulatory reporting teams, please get in touch.