UK: FCA Anti-greenwashing guidance and extension of the SDR to portfolio managers

FCA Finalised non-handbook guidance on the anti-greenwashing rule

The FCA’s finalised non-handbook guidance on the anti-greenwashing rule (FG24/3) (Guidance) was published on 23 April 2024.  This long-awaited Guidance has been highly anticipated by regulated firms given that the new anti-greenwashing rule takes effect within weeks on 31 May 2024.  The anti-greenwashing rule is part of a package of measures that the FCA finalised in November 2023 through the FCA Policy Statement on Sustainability Disclosure Requirements (SDR) (PS23/16) and the guidance consultation on anti-greenwashing (GC23/3).  For further details about PS23/16 and the guidance consultation on anti-greenwashing, please see our previous Engage article linked here.

Background to the anti-greenwashing rule

The FCA’s Financial Lives Survey (2022) showed that 74% of adults surveyed agreed that environmental issues are important to them and 79% agreed that businesses have a wider social responsibility than simply making a profit.   As the demand for sustainable products and services grow, so does the potential risk of ‘greenwashing’.  This is defined as firms making exaggerated, misleading and/or unsubstantiated sustainability-related claims about their products and services. Tackling greenwashing is a regulatory priority for the FCA who want to protect consumers against greenwashing so they can make informed decisions that are aligned with their sustainability preferences.  The FCA states that it may take supervisory or enforcement action in relation to greenwashing where it has reason to believe that there is a risk of consumer harm or where serious misconduct may have taken place.

The anti-greenwashing rule aims to clarify to firms that sustainability-related claims about their products and services must be fair, clear and not misleading.  It gives the FCA an explicit rule on which to challenge firms if the FCA considers that they are making misleading sustainability-related claims about their products or services and if appropriate, take further action. 

The Guidance aims to help firms understand and implement the anti-greenwashing rule.  The FCA says that the Guidance is consistent with existing expectations and does not create new obligations for firms but instead provides principles-based Guidance across all sectors.  The FCA intends to provide support to industry on the implementation of the regime through stakeholder engagement including webinars and events and it will keep the Guidance under review to see if there are areas it can build on as well as  additional sector-specific examples it can add. 

Scope of the anti-greenwashing rule

The anti-greenwashing rule applies in relation to financial products and services that refer to sustainability characteristics (environmental and/or social characteristics) which FCA-authorised firms make available for clients in the UK either by:

• communicating with clients in the UK in relation to a product or service, or
• communicating a financial promotion (or approves a financial promotion for communication) to a person in the UK.

References to sustainability characteristics could be present in (but are not limited to) communications that include statements, assertions, strategies, targets, policies, information, and images relating to a product or service.

The anti-greenwashing rule is intended to complement and be consistent with the other relevant rules that apply to regulated firms.  For example, firms subject to the Consumer Duty will need to consider that the expectations under the anti-greenwashing rule for the retail market are consistent with the Consumer Duty.

The scope of the anti-greenwashing rule relates to products and services but the FCA reminds firms that they should take into account the Competition and Market Authority’s (CMA) guidance and the requirements of the Advertising Standards Authority’s (ASA) guidance as well as the Consumer Duty (Principle 12 and the rules in PRIN 2A) and FCA Principles 6 and 7 as appropriate when making sustainability-related claims about itself as a firm.

The practical effect of the anti-greenwashing rule is that sustainability references should be:

• Correct and capable of being substantiated
• Clear and presented in a way that can be understood
• Complete
• Comparisons to other products or services should be fair and meaningful

The Guidance provides the FCA’s expectations and examples under the anti-greenwashing rule which UK regulated firms should refer to when reviewing their external product and services communications and promotions. Given the breadth of the rules, UK regulated firms should evaluate and seek to implement any additional compliance measures in order to meet the FCA’s latest expectations.

Feedback to the Guidance Consultation (GC23/3)

Chapter 3 of the Guidance provides some feedback from GC23/3 and shows where the proposed guidance and the finalised Guidance differ. This includes clarifying that the rule is consistent with and complements existing rules in the FCA Handbook for example COBS 4.2 that references should be ‘fair, clear and not misleading’.  The FCA confirmed that the new anti-greenwashing rule is not a substitute for, nor does it override those rules.  Firms should consider the type of evidence that would be appropriate to ensure their claims are fair, clear and not misleading and should consider making this evidence public (where appropriate to do so).

In response to calls for more practical examples of good practice, the FCA has added two additional examples in Chapter 2 of the Guidance but these should not be treated as exhaustive and firms have been reminded to consider how the principles of the Guidance apply in relation to their business and the claims they are making.

The guidance is due to come into force on 31 May 2024 and the FCA states that most respondents to GC23/3 were supportive of this start date.

In summary, the Guidance is intended to create a level playing field for firms in a quickly evolving market.  The FCA has tried to strike a balance between providing specific examples of good and bad practice and allowing firms the freedom to consider how the principles of the Guidance apply in relation to a firm’s business and the clients they are communicating with.  In some areas, firms may have benefitted from additional examples particularly as to how the anti-greenwashing rule might apply to a broader range of sectors than those currently covered by the examples.  We would be more than happy to have a general discussion or help with any specific questions you have about the Guidance so please do get in touch.

Extending the labelling and SDR to portfolio managers

The FCA also published a consultation paper (CP24/8) on 23 April 2024 on extending the SDR and labelling regime to portfolio managers.  The proposed rules mirror those introduced for asset managers in November 2023 in PS23/16 and include:

• product labels to help consumers understand what their money is being used for; and
• naming and marketing requirements so products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.

CP24/8 will be of interest to firms providing portfolio management services which are defined in CP24/8 as a service provided to a client which comprises either:

• managing investments; or
• private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is investment in unlisted securities.

The FCA proposes to extend the SDR and investment labels regime to all forms of portfolio management services, including where the portfolio management offering (the agreements or arrangements) are model portfolios, customised portfolios and/or bespoke portfolio management services (tailored to the clients’ needs and preferences).  It depends on the nature of the business model as to how the proposed rules will apply.  The SDR and labelling regime has been developed primarily for retail investors, also referred to CP24/8 as ‘consumers’.  The proposals to extend the regime are primarily aimed at wealth management services for individuals and model portfolios for retail investors.

Firms offering portfolio management services to professional clients (or institutional investors), which are referred to in CP24/8 as ‘clients’, can also opt in to the labelling regime. The term ‘clients’ which is used more broadly in the proposed rule-making instrument in Appendix 1 to CP24/8 is intended to cover both retail and professional clients.

Under CP24/8, portfolio management offerings will be able to use one of the four SDR labels including: Sustainability Impact; Sustainability Mixed Goals; Sustainability Focus and/or Sustainability Improvers if at least 70% of the gross value of the assets within the portfolio are invested in line with the sustainability objective and other qualifying criteria.

The implementation timelines proposed for portfolio managers to apply the SDR and labelling regime are the same as those for asset managers confirmed in November 2023.  The naming and marketing rules for portfolio managers are proposed to apply from 2 December 2024 if the offerings are aimed at a retail audience, alongside a requirement for portfolio managers to produce consumer-facing disclosures if using a label or adopting sustainability-related terms without a label. 

In light of these timeframes, portfolio managers will need to quickly evaluate the implications of these rules to their business and implement any necessary uplifts to their product materials (especially disclosures).

The package of measures described in CP24/8 aim to help ensure that portfolio management offerings that claim to be sustainable investments meet high standards and enhance trust in the market. 

The FCA confirms that overseas funds remain out of scope of the SDR and labelling regime.  HM Treasury (HMT) has announced its intention to consult on extending the regime to overseas recognised funds in due course. The FCA states that it will continue to engage with HMT to understand the options but any extension to overseas funds is a matter for HMT.

Next steps

Anti-greenwashing rule

All authorised firms need to meet the anti‑greenwashing rule on 31 May 2024. Asset managers who are not using labels but are using sustainability‑related terms in their naming and marketing will not need to comply with the additional naming and marketing rules or produce the associated disclosures under the SDR and labelling regime until 2 December 2024. However, they must still comply with the anti‑greenwashing rule from 31 May 2024 and ensure their sustainability claims are fair, clear and not misleading and consistent with the sustainability characteristics of the product and service.

SDR extension to portfolio management

In relation to extending the SDR and labelling regime to portfolio management, the FCA is requesting comments on CP24/8 by 14 June 2024.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area. We will be keeping a close eye on these important development so please get in touch if you would like to discuss further or have any questions which can be directly in the first instance to the contacts in this article. 

Authored by Rita Hunter, Julia Cripps and Melanie Johnson.