The FCA’s long-awaited anti-greenwashing rule came into force on 31 May 2024. This rule is part of the wider Sustainability Disclosure Requirements regime and reflects the FCA’s strong commitment to ESG and to supporting the Government’s commitment to achieving net zero by 2050.

The anti-greenwashing rule, which is contained in a new Chapter 4.3 of the ESG module of the FCA’s Handbook, has a broad application, extending to all FCA authorised firms that either communicate with clients in the UK in relation to products or services or which communicate / approve financial promotions to persons in the UK.

The effect of the rule is that any reference to the sustainability characteristics of a product or service must be consistent with those characteristics and also must be fair, clear and not misleading. Whilst this to a large extent replicates the existing rules for financial promotions as contained out in COBS 4, by imposing specific standards applicable to greenwashing, the FCA is not only bringing ESG compliance into sharper focus than ever before but also aligning itself more closely with other regulators, both domestically and abroad.

Whilst the new anti-greenwashing is certainly likely to lead to enforcement action in time, it is unrealistic to expect any published outcomes citing a breach of this rule in the immediate future; typically, it takes at least two to three years for enforcement outcomes to follow a new rule. However, the FCA’s pre-existing suite of powers, as well as its principles-based approach to enforcement, is certainly broad enough for it to be enforcing against greenwashing now, whether that is on a criminal basis under the Financial Services Act 2012 or on a regulatory basis for breach of its rules or Principles. For instance, Principle 1 requires a firm to act with integrity and Principle 7 stresses the need for authorised persons to communicate with clients in a way which is clear, fair and not misleading; both of these could be invoked by the FCA where a firm engages in greenwashing or other forms of mislabelling.

Although regulated firms should certainly be mindful of the potential enforcement risk arising from the new rule, its more immediate impact is likely to be on the compliance departments of any regulated firms which make claims about the “green” or “sustainable” credentials of their products and services. The FCA’s guidance is that any such claims must be: (i) correct and capable of being substantiated; (ii) clear and comprehensible; (iii) complete; (iv) and that any comparisons must be fair and meaningful. 

To ensure compliance with this, firms should be urgently assessing all of their products and services – and any related advertising – to identify how far they are marketed on a “sustainable” basis. Where they identify such products / services, it will be essential to conduct a proper analysis of each to determine how far such labels can be substantiated, and to take any necessary corrective action quickly.

More generally, firms should also be carefully assessing the systems and controls in place to ensure and oversee the green credentials of any products of service and analysing whether there is effective risk management and governance around ESG issues. Similarly, firms should also be reviewing – and updating – all documentation, including terms and conditions, commercial contracts and advertising (whether online or hard copy) to ensure that it complies with this enhanced standard and considering whether existing training available to staff is adequate or needs to be enhanced or refreshed.

As part of its ongoing supervisory work, it is likely that the FCA will challenge firms as to the steps they have taken in response to the anti-greenwashing wash. Firms may be required to provide evidence of the work undertaken and any changes made, and where they fail to do so may potentially face supervisory action (which can involve the imposition of restrictions on business activities and the forced withdrawal of advertising) and in the most extreme cases possible enforcement action.

This rule is clearly an important development and one that firms must take seriously. It signals that ESG is now a key regulatory issue and must become a central aspect of the compliance culture of all those in the regulated financial services sector. Any failure to do so is not something that the FCA will ignore.

Further infromation

If you have any questions regarding the blog above, please contact James Alleyne in our Criminal team.

About the author

James Alleyne is Legal Director in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.