The Financial Conduct Authority’s new anti-greenwashing rule (AGR), which came into force on 31 May, places significant requirements on FCA-regulated firms to ensure their ESG-related claims are ‘clear, fair and not misleading’ and can be backed up with evidence about the characteristics of the product or service.
‘It doesn’t have to be deep science, but they have to show they have a rational basis for being able to make those sorts of statements within the disclosures they are making,’ says Richard Weighell, partner in risk and advisory services at BDO.
‘The critical thing is the governance element and the control environment’
Advisers will need to support those falling within the regulation’s remit, which includes insurers, wealth managers and financial advisers, to develop the capability to disclose meaningful information on sustainability criteria, and implement internal controls and reporting mechanisms to track and substantiate their claims and ensure they are backed by verifiable data.
‘The critical thing with this piece of regulation is the governance element and the control environment, and how firms build it into their risk management framework,’ says Jess Hodges, Deloitte’s UK investment management and wealth ESG lead.
Representative picture
The FCA’s guidance states that references must be correct, clear and complete, and that comparisons to other products must be meaningful.
Although firm-level disclosures are, strictly speaking, not caught by the rule, the FCA’s guidance stresses that organisations should consider whether information about the firm itself may be considered part of the ‘representative picture’ of a product or service.
‘Firms are tying themselves up in knots around what may be considered part of the ‘representative picture’ of a product or service, says Rashim Arora, head of sustainability and ESG, financial services, at Grant Thornton. ‘It is a very grey area.’
Arora suggests firms should have ‘a dedicated governance forum that understands the nuance of the anti-greenwashing rule and guidance to make decisions on contentious items that are subjective and difficult to interpret or assess’.
‘Don’t assume it is just the product brochure you put out. It is bigger than that’
The rule will apply to all communications about financial products and services that refer to sustainability characteristics. This includes statements, assertions, strategies, targets, policies, information and images.
When preparing to implement the AGR, firms will need to identify their in-scope communications and ‘establish their perimeter’ of their greenwashing risk, says Michelle Adcock, director in KPMG’s regulatory insight centre.
‘There is conceptually this bigger picture that if a firm makes claims about itself that are subsequently found to be inaccurate or misleading, that does colour people’s perception of the firm overall and then consequentially its products and services,’ Adcock says.
She adds that firms should look at everything – websites, videos, podcasts, social media. ‘It is not just one pocket of activity; it is across the whole firm,’ she says. ‘Don’t assume it is just the product brochure you put out. It is bigger than that.’
Building a toolkit
The FCA’s guidance emphasises that sustainability claims should be clear and easy to understand. Technical language may need to be explained, and terms that might give an impression a product has sustainability characteristics it doesn’t have should be avoided.
And those organisations that are in scope of the FCA’s Consumer Duty – which requires firms ‘to act and deliver good outcomes for retail customers’ – should test those communications with consumers.
Arora advises that firms develop an ‘assessment framework’ to establish where their products and services ‘have some sort of sustainability genesis or nexus’ and prioritise them according to greenwashing risk.
‘It is critical to have a firm-wide agreed internal taxonomy that is communicated and understood’
That framework will typically include industry best practices, the FCA’s ‘Dear CEO’ letters, its final AGR guidance, and examples from litigation cases related to greenwashing.
‘Bringing that all together allows you to develop an assessment toolkit that can effectively be used to begin to consistently assess claims, disclosures and statements that firms have made about products and services in relation to sustainability,’ Arora says.
But going back and reviewing every document and communication that has a sustainability disclosure will be very labour intensive, involving multiple individuals. So it’s essential that everybody is working to the same set of standards and has consistent guidance.
‘We are still waiting for an agreed UK taxonomy,’ says Hodges, ‘but the regulator recognises that there will still be a certain amount of variation between different organisations depending on their strategic objectives. So it is critical to have a firm-wide agreed internal taxonomy that is communicated and understood.’
The four Cs
The effect of the anti-greenwashing rule means references should be:
- correct and capable of being substantiated
- clear and presented in a way that can be understood
- complete – they should not omit or hide important information and should consider the full lifecycle of the product or service
- and comparisons to other products or services must be fair and meaningful.
Governance forums
A lot of greenwashing is inadvertent, so it is important that firms have governance in place to oversee and make pragmatic decisions on contentious items and demonstrate that the disclosure or statement has gone through due process and rigour before it has been made.
Weighell says that both the first line – distribution and sales – and second line of operations and compliance must be made fully aware of what the guardrails are for good and bad examples of greenwashing.
The claims that firms make must comply with the AGR on an ongoing basis
This could include setting up an impartial governance forum that may be an extension of an existing forum, like a reputational risk forum, that looks at these subjective items.
‘The second line needs to have an involvement in the governance process. If it is all left to the people whose day job is about selling the products or promoting the firm, there is more of a danger of an over-enthusiastic approach,’ says Weighell.
The claims that firms make must comply with the AGR on an ongoing basis. So they will need to be reviewed regularly, along with any supporting evidence required to back up the statements throughout the time they are communicated.
‘If you can demonstrate due process and rigour, and document the steps you have taken to reach that conclusion, it can go a long way when talking to regulators and external stakeholders to show you have given it the attention it deserves,’ concludes Arora.
