Finance watchdog puts focus on greenwashing - Rebecca Thomson

Scotland is a leader in renewables, and over recent years we’ve seen ambitious climate change targets act as a driver to early investment in the sector taking advantage of the country’s geography and weather to promote the generation of green energy. Against this backdrop, consumers are now more conscious than ever of the impact on the climate at both an individual and a corporate level. Legislation and regulatory frameworks have had to adapt to ensure that sustainability-minded consumers aren’t at risk of being influenced by unsubstantiated or misleading green credentials.

Greenwashing can damage the public’s trust of products or practices which purport to be ‘green’, ultimately harming the credibility of businesses which are genuinely doing great things in the ESG area. Against this backdrop, the FCA’s new anti-greenwashing rules (AGR) came into force on 31 May 2024 to help consumers navigate the market for sustainable investment products, which form a vital part of the wider renewables industry, given that ultimately every project large and small has to be funded and paid for.

The rules apply to FCA-authorised firms (including banks, asset management and investment firms) and say firms must ensure any reference to the sustainability characteristics of a product/service is consistent with the sustainability characteristics of the product or service and be fair, clear and not misleading.

​Greenwashing can damage the public’s trust of products or practices which purport to be ‘green’ (Picture: stock.adobe.com)

The rules apply when a firm (whether it is undertaking sustainability in-scope business or not) communicates with a client in the United Kingdom in relation to a product or service or communicates a financial promotion to, or approves a financial promotion for communication to, a person in the United Kindom.

The guidance provides in essence that sustainability references should be:

• Correct and capable of being substantiated;
• Clear and presented in a way that can be understood;
• Complete – they should not omit or hide important information and should consider the full life cycle of the product or service providing a representative picture; and
• Comparisons to other products or services are fair and meaningful.

Will the introduction of the AGR have a direct impact on investments in Scotland’s renewable sector? Probably not. The FCA has already stressed that, for the most part, the AGR doesn’t introduce a new requirement. Firms should already be ensuring their claims are fair, clear and not misleading under existing FCA rules, and compliant with related guidance by the Competition and Markets Authority.

Rebecca Thomson is an Associate, TLT LLP

The fact remains, however, that the FCA has considered it appropriate to introduce the AGR to supplement the existing rules and requirements. The AGR provides a new, more focused, framework for supervision and enforcement in relation to sustainability claims, and the FCA has signalled an intention to use its powers to manage non-compliant firms. The rules increase the profile of the FCA’s expectation of firms to the public and opens non-compliant firms to allegations of misrepresentation.

Practically, firms should mitigate risk by:

• Undertaking a review of the firm’s compliance frameworks and relevant policies and procedures;
• Capture and review all sustainability references;
• Training for all relevant staff;
• Monitoring updates to relevant guidance from the FCA; and
• Careful assessment and testing of the evidence upon which sustainability claims are based.

As well as being costly, the AGR is likely to cause further administrative burden, for some firms. However, the rule applies UK-wide, and Scotland has an opportunity to build on its experience in the sector by providing examples of best practice and maintaining the integrity of sustainable investment products against the threat of greenwashing.

Rebecca Thomson is an Associate, TLT LLP