Banks, Asset Managers Warned of ‘Huge’ Fallout From UK’s New Greenwashing Law

Banks and asset managers in the UK woke up to a new reality on Friday, as the country enforces some of the most far-reaching anti-greenwashing rules ever seen.

Due to its broad scope, the new requirement from the Financial Conduct Authority is “going to capture a huge range of communications” within the finance industry, said Clare Wiles, a managing associate in Linklaters’ financial regulation team.

Some in the industry had hoped the May 31 enforcement of the new rule would be delayed. But the FCA made clear in April that it was moving ahead, triggering a wave of warnings from lawyers and consultants. EY says the requirement means finance-sector clients must “urgently review” all their green claims, with the FCA set to look at everything from marketing materials to fund documentation, bond prospectuses, websites and general communications.

There’s been “a level of concern among banks about responding to the anti-greenwashing rule within the tight timeframe,” said Richard Monks, a partner at EY and former director of strategy at the FCA. While the sector has done what it can to comply, “some banks may not be confident in their anti-greenwashing control environments by today’s deadline — it will be a work in progress.”

The FCA says it will assess all public statements that have the potential to mislead investors and clients about the true sustainability of a product or service. That includes the “overall impression a visual presentation of a claim” can create, according to the regulator.

For example, a bank that uses a photo of a rainforest on client-facing information about a savings account may be in breach, if the client can be assumed to be left with the impression that the product is greener than the FCA judges it actually is.

“Banks will have to be careful” because the FCA hasn’t provided a detailed definition of how it views “sustainability characteristics,” Wiles said.

Angela Hultberg, sustainability director at consultancy Kearney, notes that the new rules force companies “to make evidence-based product labels that clearly explain to consumers what their money is being used for.”

“While the general public is already getting better at identifying misleading claims, as reflected by the rising number of civil society actions on this issue, today’s legislation should mean that in the future, they won’t have to,” she said.

A study by the UK Sustainable Investment and Finance Association conducted together with PwC found that firms are nervous the FCA’s new rules may open the door to new litigation risks. The upshot is that firms could be forced to gather considerably more data than is currently the case, according to the study’s authors.

The risk of being accused of greenwashing has grown substantially as new environmental, social and governance regulations give rise to greater scrutiny from investors and the general public. That’s as asset managers and banks make green funds, products and other services an increasingly important plank of their business.

Regulators have responded with a growing list of curbs to ensure the public isn’t being misled. The FCA rules are the first step in a broader set of requirements targeting overblown ESG claims in the sector, with fund-naming rules set to come into force later this year.

The UK’s efforts to crack down on greenwashing are part of a wider European push. Earlier this week, the European Securities and Markets Authority said corners of the region’s fund industry have been routinely touting their ESG credentials without providing documentation. The EU will consider new measures to stop greenwashing, pending the results of an almost two-year study by regulators in the bloc.

UK financial firms now need to review existing and new products to ensure that appropriate anti-greenwashing controls are in place, according to lawyers advising the industry.

Continuous monitoring and updating of a product’s sustainability status is required to maintain compliance, said Lucy Blake, a partner at law firm Jenner & Block.

Under the new UK rules, firms will “need to avoid cherry-picking data and ensure transparency by considering the full life cycle of products in sustainability claims,” Blake said.

What’s more, firms “must also be cautious about relying on third-party information, as they are responsible for verifying and transparently sourcing all data,” she said.

James Alexander, chief executive at the UK Sustainable Investment and Finance Association, said the new rules pose “an administrative challenge” for financial firms. But the requirements are also “important and valuable,” he said.

Ultimately, the UK’s new anti-greenwash framework “helps level the playing field for firms who have been doing the right thing,” he said.

Photograph: The Shard skyscraper next to Tower Bridge and other commercial office buildings in London, UK, on Friday, March 22, 2024. Photo credit: Chris Ratcliffe/Bloomberg