Greenwashing and Consumer Duty: Get Spring cleaning your green claims before the greenwashing rules kick in!
With the bulk of the long-awaited Sustainability Disclosure Requirements (SDR) and investment labels focused on Asset Managers it would be easy to think that the rules may not apply to other financial services firms. However, the new anti-greenwashing rule applies to all FCA regulated firms who communicate with clients in the UK in relation to a product or service, or who approve financial promotions for communicating to a person in the UK. The new anti-greenwashing rule comes into force on 31 May 2024, so firms have just under 5 months to ensure they are not breaching the requirements.
In the regulators usual fashion, the rule states that any sustainability characteristics of a given product or service must be presented in a fair, clear, and not misleading way. This covers all forms of communication, from statements to imagery, as well as any particular environmental and/or social characteristics which may be highlighted.
And whilst the anti-greenwashing rule’s scope of application is broader than the Consumer Duty, there are clear linkages with the Duty’s core expectations in product design and communication of information through “the product & services” and “customer understanding” outcomes.
Considering this, we’ve summarised the FCA’s guidance (alongside the relevant bits of the Consumer Duty) to navigate this, focusing on the four key criteria which every communication must meet.
To be compliant with the rule, all your Firms’ communications will need to be:
1. Correct and capable of being substantiated
Sustainability claims should be factually correct, as well as avoid any exaggerations or overstatements concerning their sustainability impacts or characteristics. This means that Firms should be able to back those claims with evidence if necessary and avoid providing conflicting or contradictory information. In practice, those approving financial promotions at your firm will need to review their compliance with the anti-greenwashing rule, as well as implement consistent monitoring throughout the lifetime of the promotion. We would expect firms leading in this area to make such supporting evidence publicly available in an easily accessible way (e.g., in a prominent place on the firm’s website).
Example
An insurer claims to bring sustainability in its operations to the “highest possible standard.” Whilst this may be true, said insurer should be able to evidence its green credentials with updated datapoints which maintain the validity of the claim. Also, it should be capable to offer its rationale to classify its performance as the most ambitious possible by demonstrating, for example, that no other insurer has demonstrated a higher sustainability standard.
2. Clear and presented in an understandable way
All claims need to be transparent and presented in a straightforward way, with all terms able to be understood by their target audience. Firms should be reviewing the following: any technical language, unless its commonly understood or adequately explained; use of vague, broad, or general terms which may be confusing and may mislead on its sustainability characteristics; the imagery they use to represent their products, since sustainability-related colours or images can create a wrong perception of a products’ characteristics.
Through the Consumer Duty, there is a requirement for Firms to ensure that customers fully understand the product and its features, so that they can make informed decisions about any financial investment. Therefore, if you’re referencing any sustainability claims, these must be clear, fair, and not misleading. To enable this, Firms must ensure that they know the profile of their customers (especially those considered as vulnerable) and must test communications from the view of whether their typical customer would be able to understand product features, risks and more widely, any sustainability claims associated with the provider. To complete the loop, Firms should consider how they can monitor customer understanding, for example through complaint MI, and feed this back into the ongoing development of their communications and products.
Example
A firm has all its lending products available in the same website section, decorated with a picture of a forest. However, amongst all the products on display, only one of them can be categorised as a green loan. In this context, the audience may be misled to believe that all products offered on that site are environmentally sustainable due to the marketing imagery used.
3. Complete, without omitting any relevant information
Claims should convey a representative picture of the product or service, without hiding any relevant information which may influence decision-making. If claims can only be upheld if certain conditions are met, or the information relied upon to make them has inherent limitations, these should be disclosed. Furthermore, claims should be provided in a balanced way with both its positive and negative aspects, and the whole lifecycle of the product must be considered. In essence, information should not be cherrypicked.
Furthermore, withholding information is likely to fall foul of the Consumer Duty “Acting in good faith” cross-cutting rule and may raise a red flag to the FCA around a firm’s general culture and integrity. If information is seen to be being withheld, or risks are not appropriately articulated, this could be considered part of the design of a “representative picture” of a customer’s decision-making process.
Example
A bank has a green loan range to fund activities in line with the “green energy transition.” However, research and development towards carbon capture & storage (CCS) can be found amongst the eligible economic activities – information which is not included in the promotional materials. Since the use of CCS is contested due to its linkage with high-emitting energy sources, an omission of this information could mislead consumers which may associate this technology with negative impacts on the environment.
4. Fair and meaningful in relation to comparisons with other products and services
Comparisons to previous versions or a competitors’ product or service should be fair and meaningful to help its audience make informed decisions. This includes making clear what’s being compared and how the comparison is being made. Moreover, if claims refer to sustainability characteristics which make a product or service compliant, these could be misleading as they could make it appear superior to others which meet the same requirements.
Example
If a listed business in the UK claims to be a leader in sustainability and lists the integration of climate-related risks in their conventional risk management framework as fundamental criteria to evidence this claim, it would result in a misleading comparison. Since all listed Firms in the UK must produce TCFD reports (i.e., reports on governance, strategy, risk management, and metrics surrounding climate-related issues), this claim is therefore likely to be understood by its audience as a distinctive feature of the Firm when it really isn’t.
Our Compliance and ESG & Sustainability teams at Avyse have previously worked both on Consumer Duty implementation and green claim reviews. If you believe that your Firm needs a ‘Spring clean’ in anticipation of the greenwashing rule coming in, do get in touch with us.
