The FCA’s stick and your true colours
Guest article from Dasha Konnova, Associate, Litigation, Arbitration & Investigations and Terry Yiangou, Managing Associate, Finance at Linklaters.
The upcoming anti-greenwashing rule carries litigation and reputational risk. Annual reports might need to approach sustainability-related content differently.
The FCA’s Anti-Greenwashing Rule
At the end of 2023, the FCA published its “Policy Statement 23/16”, housing the finalised ‘anti-greenwashing rule’ (AGR) and accompanying “Guidance Consultation 23/3”.
The AGR will apply to all FCA-authorised firms regarding their products/services, where they:
(i) communicate with a UK client about a product/service; or
(ii) communicate/approve a financial promotion to UK persons.
In such cases, the AGR will then require firms to ensure that any references to the sustainability characteristics of the product/ service are:
(i) consistent with the actual sustainability characteristics of the product/service; and
(ii) fair, clear and not misleading.
The AGR is due to apply from 31 May 2024 (although there are rumours that this could be delayed to December 2024).
In practical terms, the consultation paper provides a steer on what the FCA expects for the AGR, e.g., stating that sustainability references must be:
(i) correct and capable of being substantiated;
(ii) clear and presented in a way that can be understood;
(iii) complete (i.e. not omit or hide important information and should consider the entire life cycle of the product/service); and
(iv) fair and meaningful about any comparisons to other products/ services. Furthermore, the FCA also reminds firms of the magnitude of the AGR, noting that sustainability-related references can (among other places) be present in statements, assertions, strategies, targets, policies, information and even images!
“Risks stemming from greenwashing include, inter alia, litigation from NGOs.”
From a risk perspective, the FCA asserts that “tackling greenwashing is a regulatory priority for us. We want to protect consumers from greenwashing…” and that “this rule allows us to challenge firms if we consider they are making misleading claims about their products or services and, if appropriate, take further action”. Regulatory enforcement should, therefore, be expected, and, in recent years, the FCA’s Director of ESG has also been quoted in the media as saying that whilst the regulator does not necessarily “want to go straight for the stick”, eventually “fines will come”1;. Additional risks stemming from ‘greenwashing’, of course, equally exist – including, inter alia, litigation (e.g. from NGOs, etc.), reputational and commercial risks.
FRC – increasing focus on ESG disclosures in company reporting
Under the FCA’s listing rules, premium-listed and standard-listed companies must make disclosures under the Task Force on Climate-Related Financial Disclosures (TCFD) framework and include a statement to that effect in their annual report. As prefaced in its update to the Statement of Intent on Environmental, Social and Governance challenges in January 20232, in July 2023, the FRC published a thematic review of climate-related metrics and targets of twenty UK premium and standard listed companies, setting out its cross-sector and sector-specific observations and expectations of companies’ future reporting in respect of mandatory TCFD reporting3.
Crucially, the FRC’s review found that:
(i) the clarity of metrics used to track progress; and performance against these targets can be improved, and
(ii) companies are expected to enhance their explanation of how climate-related targets and transition plans impact the financial statements.
“Whilst the regulator does not necessarily want to go straight for the stick, eventually fines will come.”
The FRC will likely engage in substantive correspondence with companies that do not meet the expectations set in thematic reports, particularly when climate change is significant to the company, and recommended disclosures are not provided.
Whilst the FRC will take the lead in ensuring compliance with the listing rules and asking for better disclosures, if the FRC considers any of the information it has identified to be potentially false or misleading or to omit material facts, it will refer this to the FCA for consideration of enforcement action.
Thank you to Dasha Konnova and Terry Yiangou at Linklaters for the insights.