By Teja Pisk and Elizabeth Butler
There has, up to now, been little pressure on financial services providers to justify any claims they may make regarding the ESG credentials of their products. However, all that is about to change with the FCA’s upcoming anti-greenwashing measures.
Due to increasing consumer interest, the number of products and services claiming to be environmentally friendly and sustainable has grown in recent years. This has, in turn, led to concerns that organisations may be “greenwashing” by making misleading and unsubstantiated claims about the environmental performance or impact of their business, products, or services.
Whilst there is currently no legal definition of “greenwashing”, the legal and regulatory landscape is changing at pace. Recently, the Financial Conduct Authority (FCA) announced that it is introducing new measures designed to “clamp down on greenwashing”, protect consumers and “improve trust in sustainable investment products”. One of the measures is an anti-greenwashing rule which will sit in Chapter 4 of the FCA’s Environmental, Social and Governance sourcebook and which provides: “A firm must ensure that any reference to the sustainability characteristics of a product or service is: (a) consistent with the sustainability characteristics of the product or service; and (b) fair, clear and not misleading.”
The rule will apply to all FCA-authorised firms and all communications about financial products or services where they refer to environmental and / or social characteristics of those products and services.
The FCA’s consultation on its draft guidance on the new anti-greenwashing rule closed on 26 January 2024; the rule and final version of the related guidance will come into force on 31 May 2024.
At present, the draft guidance indicates that the FCA expects firms to ensure that their sustainability-related claims are correct and capable of being substantiated, are clear and presented in a way that can be understood, and are complete (i.e., they should not omit or hide information), fair and meaningful in relation to any comparisons to other products or services.
What are the risks of non-compliance?
The new measures signal the regulatory priority that the FCA intends to give to tackling greenwashing. Under the new rule, the FCA is able to challenge firms if it feels that they are making misleading claims about the sustainability of their products or services and, if necessary, take further action. So what might that entail? Well, the FCA has confirmed that it will apply its usual supervisory and enforcement powers to policing compliance with the anti-greenwashing rule. The FCA has a wide range of civil, criminal, and regulatory enforcement powers which include the ability to withdraw a firm’s authorisation, suspend firms from undertaking regulated activities, and issue fines against firms and individuals in breach of the FCA’s rules. The FCA can also make a public announcement when it commences disciplinary action and can publish details of warning, decision, and final notices on its website.
Any such enforcement action by the FCA will no doubt prompt interest from other stakeholders, increasing the risk of litigation by parties that consider they have suffered damage as a result of untrue or misleading statements. Other regulators are also likely to take an interest. Hence, firms which fail to comply with the new measures not only risk significant sanctions being imposed on them by the FCA, but also reputational harm affecting the entire business. This is likely to result in loss of clients and market confidence, as well as damage to the firm’s recruitment capabilities.
In light of this, all FCA-authorised firms would be well advised to familiarise themselves with the new measures and to exercise caution. It would be far better for firms to take steps now to ensure they stay on the right side of the legal line than to find themselves exposed to claims that would be not only financially damaging, but also reputationally damaging.
What can businesses do to mitigate the risks?
Don’t delay: Firms should act promptly; the new measures come into force in May 2024.
Be cautious when making environmental claims. Firms should ensure that their claims are accurate, not misleading, and comply with current relevant guidance. They should be mindful that the regulatory landscape is changing fast; those treading the line or perhaps overreaching in demonstrating their ESG credentials may suddenly find themselves on the wrong side of new legislation and exposed to potential legal action.
Obtain expert advice: Legal teams should be closely involved in shaping public documents including prospectuses, annual reports, and other investor communications. It is important to ensure that well documented steps are taken to verify the accuracy of all ESG statements, and directors should personally satisfy themselves of the adequacy of all ESG statements.
Use clear language: Acronyms and jargon that may confuse or mislead should be avoided in favour of plain and clear language.
Keep a record of all steps taken to verify ESG-related statements made in disclosures to provide proof of belief in the accuracy of disclosures when they were made, in the event that the firm faces claims from shareholders.
Insurance: insurance policies should be kept under review to ensure they provide adequate protection for the firm and directors in case they face future legal action.
Over the past decade, the focus on ESG issues has intensified, particularly in the UK and the EU, with the introduction of new regulations requiring ESG disclosures such as the EU’s Sustainable Finance Disclosure Regulation, the UK’s Corporate Governance Code 2018, and the UK’s Modern Slavery Act. The upcoming introduction of new FCA measures suggests that the emphasis on ESG compliance isn’t going away. As greater clarity and more legislation continue to come down the line, we expect to see a consequent uptick in ESG claims and consumer actions. There hasn’t been quite as much ESG-related litigation as one might expect to date. This is likely to be because potential claimants have found themselves limited in the action they can take by the lack of legislation and regulation in the ESG field. It does, however, seem likely that the new ESG-related policies and guidance coming down the line will pave the way for an increase in the volume of ESG litigation by making it easier for claimants to formulate claims and hold to account those businesses who have not been treading the line.
About the Authors
Teja Pisk is a Senior Associate at law firm Stevens & Bolton, where she advises commercial clients on various contentious matters, including contractual disputes, misrepresentation, negligence, and franchise agreements. Having trained in the City, Teja has been at the firm since 2018 and deals with a variety of clients, including multinational corporates, owner-managed businesses, and individuals.
Elizabeth Butler is an Associate at Stevens & Bolton, where she advises clients ranging from individuals to large corporates on a variety of contentious matters, including contractual disputes, professional negligence disputes, and general advisory work.
