The FCA has introduced rules for UK asset managers managing UK-domiciled funds, certain FCA-regulated asset owners, listed issuers, distributors to retail investors, and financial advisers, as well as a labelling and classification system for investment products. While many asset managers who choose a label will be subject to core elements of the regime – labelling, classification, and disclosures, all FCA-regulated firms will be subject to the anti-greenwashing rule.
The anti-greenwashing rule comes into force first and will take effect on May 31 2024, meaning financial services firms must be prepared before the deadline to ensure compliance with the FCA.
Anti-greenwashing rule
Firstly, the anti-greenwashing rule, which is applicable to all FCA-regulated firms, mandates that any sustainability-related claims about financial products or services must adhere to specific standards outlined by the FCA. These standards dictate that representations regarding sustainability must be transparent, equitable, and devoid of any misleading information. The FCA outlines that ‘sustainability-related references, can be present in, but are not limited to, statements, assertions, strategies, targets, policies, information, and images’. Moreover, any mention of a product's sustainable attributes must be proportional to its actual characteristics.
A type of sustainability claim that could be made by an FCA regulated firm would include any reference to the sustainability characteristics that a product makes. The FCA gives an example of a claim: an investment fund is ‘sustainable’ and aims to deliver positive outcomes for people or the planet’. While this example is broad, it provides insight into the ambition of the FCA: ensuring that sustainability claims made by firms are accurate and supported by evidence.
For alternative asset managers incorporating sustainability-related policies and strategies as integral components of their investment approach, the rule necessitates a factual and proportionate description of these elements in their pre-contractual disclosures. This means that such disclosures should accurately depict the sustainability aspects of their investment policies and strategies without exaggeration or distortion.
5 steps for compliance to the anti-greenwashing rule
- Thorough documentation review
Firms are required to conduct a comprehensive review of all their documentation, including but not limited to website disclosures, Private Placement Memorandums (PPMs), and marketing materials. During this review, firms should meticulously scrutinise any sustainability-related claims they have made.
- Clarity and transparency in claims
If firms are indeed making sustainability-related claims, it is imperative that these claims are crystal clear and easily understandable to the reader. Transparency should be given priority to ensure that stakeholders can easily grasp the firm's sustainability initiatives and commitments.
- Avoidance of information omission
Firms must ensure that they do not omit any crucial information from their materials concerning sustainability-related claims. This information could potentially influence decision-making processes of investors or other stakeholders. Full disclosure is key to maintaining trust and credibility.
- Substantiation of claims with evidence
The firms must have sufficient evidence to back up the sustainability claims they make. For example, if a firm claims that all investments go through an ESG screening, but the firm does not actually intend to screen investments in this way, the FCA will flag this. However, if the firm can demonstrate the process and details of the screening on investments, they would comply with the anti-greenwashing rule.
- Avoidance of exaggeration
Firms must conduct a careful review of their sustainability-related claims to ensure they do not exaggerate the environmental or social impact of their products or services.
For most firms, it would be beneficial to begin by examining Annex 1 and 2 of the Guidance on the anti-greenwashing Rule (yet to come into effect). Here, the FCA provides details on what constitutes a sustainability-related claim, along with essential examples illustrating how greenwashing could manifest.
By implementing the anti-greenwashing rule, the FCA is signalling its intention to assess firms regarding their sustainability-related communications. It is anticipated that the regulator will take action against any firms found to be non-compliant, which could lead to fines or reputational damage to the company. This is why compliance with the anti-greenwashing rule is essential but can take time.
At Holtara, we have extensive knowledge of global sustainability regulations and can advise on whether sustainability related claims are credible and accurate, ensuring compliance with the FCA.
