FCA anti-greenwashing rule and guidance: litigation risks

The FCA has recently published a rule and guidance on its new anti-greenwashing rule, which came into force on 31 May 2024. They apply to all FCA authorised firms that make sustainability claims about products or services in communications with clients or potential clients in the UK (including financial promotions). The changes seek to address concerns that some firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims.

The new rule

• Under the anti-greenwashing rule at ESG 4.3.1R (together with finalised guidance FG 24/3), firms must ensure that any reference to all communications made by an authorised firm to a client or persons in the UK about "sustainability characteristics" of a product or service must be:
  • Consistent with the sustainability characteristics of the product or service; and
  • Fair, clear and not misleading.
    
    
• The term "sustainability characteristics" can relate to environmental and/or social features of the relevant product or service, such as promoting an investment fund as "fossil fuel free". The FCA has indicated that references to sustainability characteristics could be found in statements, assertions, strategies, targets, policies, information and images relating to a product or service, although the FCA has made it clear this is not a definitive list. The application is therefore very wide and could encompass marketing, pitch decks, and even in-person communications.

• The rule will also apply to financial products and services which any FCA-authorised firms make available to clients in the UK, including financial promotions that authorised firms communicate or have approved for unauthorised persons.

The new anti-greenwashing rule and guidance are intended to complement and be consistent with existing rules in the Principles for Businesses and Conduct of Business Sourcebook, which already stipulate that information communicated is fair, clear and not misleading, and certain requirements in specific contexts.

Key principles

The FCA will expect that any sustainability related reference in relevant material should be:

• Correct and capable of being substantiated - for example, any claim made should be factually correct, supported by robust and credible evidence and should not overstate or exaggerate a product or service's sustainability or positive environmental and/or social impact;
  
  
• Clear and presented in a way that can be understood - for example, technical language should be explained to the intended audience unless the meaning is clear and widely understood. Firms will need to consider how images, logos or colours together may be perceived alongside sustainability characteristics of a product or service and whether factually correct claims may be undermined if their visual presentation conveys a different impression (testing communications where appropriate);
  
  
• Complete - for example, a firm should not omit or hide important information that might influence decision-making. If claims are only true where certain conditions apply, these should be clearly stated. Claims should not highlight only positive sustainability impacts where this disguises negative impacts; and
  
  
• Fair and meaningful where comparisons are made to other products or services - for example, comparisons should enable audiences to make informed choices about the products or services. Claims that appear to make market-wide comparisons but are based only on a limited sample have the potential to mislead their audience.

Litigation risks

The following litigation risks arise from the anti-greenwashing rule and guidance:

• FCA disciplinary or enforcement action – this could arise from firms breaching the anti-greenwashing rule or other FCA rules such as Principle 7 which requires firms to ensure information communicated to clients is clear, fair and not misleading. Sanctions could include fines, restrictions or other variation of permissions (temporary or permanent), or a requirement to withdraw/amend any misleading claims or financial promotions, for example.

• Civil Action – claims from consumers or investors who have relied on misleading/inaccurate sustainability-related claims or financial promotions, and suffered loss as a result. A consumer or investor may seek to recover damages, rescind contracts, obtain injunctions or obtain declaration from the firm on the grounds of misrepresentation, breach of contract or negligence, for example. Competitor firms may also bring strategic claims where they have an interest in disproving a sustainability-related communication or financial promotion.

• Private Person Claims – depending on the circumstances, claims for damages under s. 138D of the Financial Services and Markets Act 2000 alongside common law causes of action.