The UK’s anti-greenwashing rule is on the horizon: Four steps for financial services firms to prepare

The Financial Conduct Authority (FCA) is expected to introduce its first dedicated anti-greenwashing rule¹ for all of its regulated firms in Q4 2023. The proposed rule clarifies that existing requirements² around ‘fair, clear and not misleading’ communications apply to the sustainability-related claims firms make about their products.

What does this mean for financial services firms?

Firms will need to be able to demonstrate to their clients and the FCA that they are not greenwashing.  A review of sustainability-related claims made in product literature and external communications will be necessary, but it is unlikely this alone will satisfy the regulator. Greenwashing is enabled by inadequate internal controls and firms need to view their approach to sustainability through the lens of greenwashing risks. But where to start?

A robust anti-greenwashing framework can give firms confidence in their ability to identify and mitigate greenwashing risks and to defend their ESG claims to regulators, clients and investors. Here are four steps firms should take now to begin building such a framework:

1. Define what is sustainable and what is greenwashing to ensure a consistent approach across the business to assessing any product (and corporate) sustainability claims. Any definition must go through appropriate internal governance processes, with robust input and challenge from the business, and be regularly reviewed. It should also consider a range of factors, such as: regulatory requirements, the type of ESG disclosure, potential behaviours associated with greenwashing, and evolving market best practice.
2. Conduct a greenwashing risk assessment to identify products at risk of greenwashing. Scrutinise sustainabilty-related assertions against the in-house definition, corporate sustainability commitments, external communications and any key ESG data considerations (e.g. quality, sources, proxies). Products marketed as sustainable should be assessed first. High risk areas should be prioritised for internal reviews and any adverse findings need to be addressed.
3. Evaluate the level of accountability and oversight of greenwashing risks and whether existing governance arrangements (if any) are adequate to identify and mitigate greenwashing risks. This should include the Board/ senior management, key committees and arrangements across the three lines of defence for governance and risk management. Where required, enhancements should be made and training provided.
4. Review ESG-related risk and control frameworks, policies, and procedures to assess whether greenwashing risk is adequately captured and considered. Internal audit can be a useful tool in this regard. Further reviews may be needed to address any identified gaps or weaknesses.  

Act now, but be flexible

An effective anti-greenwashing framework will encompass a broad range of business activities, including corporate-level strategy and commitments, governance, risk management, and product and service considerations (including reporting). Firms also need flexibility in their approach so that the framework can evolve over time. But firms can’t afford to wait. As the FCA’s rule is expected to take effect from Q4 2023 there is a lot to do to be ready and ensure compliance.  

^1. _{Introduced in the FCA’s consultation paper CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels}

^2. _{For example, the FCA’s Principle 7 (Communications with clients) says that “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.”}