Growing consumer demand for sustainable investment has led to a flurry of financial services providers trying to beef up their green credentials.
The UK’s financial watchdog, the Financial Conduct Authority (FCA), says this has led to concerns that some firms are making “misleading or exaggerated sustainability-related claims” about their products.
Last month, the regulator brought in the first in its series of new measures to crack down on suspect sustainability claims in finance.
The ‘anti-greenwashing rule’ applies to ALL FCA-authorised firms, from banks and financial advisers to investment platforms and pension providers.
The FCA says: “It gives us an explicit rule on which to challenge firms if we consider they are making misleading sustainability-related claims about their products or services and, if appropriate, take further action.”
What is the new anti-greenwashing rule?
Under the anti-greenwashing rule, any sustainability claims made about financial products or services MUST BE:
1. Backed up by facts
If a financial firm markets a product or service as ‘sustainable’, they will need to be able to back the claim up.
This applies to any type of language that aims to communicate to a potential customer that the product is “green” or good for the planet.
Any sustainability claims must be ‘clear, fair and not misleading’. For example, if a savings account or investment fund is labelled as ‘ethical,’ ‘sustainable’ or ‘green’, there now must be evidence provided to the consumer that supports that claim.
2. Presented clearly
The rule covers both language AND images. If a product is advertised as sustainable, it must be absolutely clear to the consumer why and how this is true.
With investment funds, any language about sustainability must be matched directly to the aims of the fund.
For example, a fund can no longer be described as ‘sustainable’ if it takes ESG (environment, social, and governance) considerations into account, but still invests in fossil fuels.
Firms also cannot use images, logos and colours (such as a photo of trees next to a savings account) to give an ‘impression’ of sustainability. Visual elements must be consistent with the sustainability characteristics of the product or services they are used alongside.
3. Transparent and complete
Financial firms will no longer be allowed to talk only about the ‘good’ – and hide the bad – when it comes to the impact of their products and services.
With investment funds, they will need to explain how the ‘screening’ process (where destructive activities are screened out and positive ones potentially screened in) works.
An example, given by the FCA, is if an investment fund says it only includes companies in a fund that have an ‘ESG rating of 3 or higher’, they will now need to explain what that actually means and whether it is a high bar or not.
4. Fair and meaningful
If a firm claims that their product is better for the environment than others on the market, the comparison will now need to be ‘fair and meaningful.’ They can’t just pick out a specific metric and time frame that supports their point, but that is not wholly representative of the bigger picture.
Are there shortcomings to the new rule?
The anti-greenwashing rule applies to products and services offered by an FCA-regulated firm – not the firm themselves.
Green finance campaign charity Make My Money Matter has written to the regulators asking for an investigation into the ways high street banks communicate their impact on the planet, not through specific products or services but as a whole.
It’s just the start!
The anti-greenwashing rule is the first in a series of new rules being introduced by the FCA. The next is a set of four sustainability labels for investment funds that will come into effect on 31 July 2024. This will be followed by naming and marketing rules, which begin on 2 December 2024. Find out more here.
What if you suspect the rule is being broken?
If you suspect that a financial provider is greenwashing under the new rule, you can report your concerns to the FCA either by telephone or an online form.
Find out more in our Good Guide to Avoiding Greenwash – get your instant download here.
