In today’s financial landscape, consumers face a significant dilemma: They want to “go green” with their money but fear they’ll be undermined by greenwashing activity. One survey found that 64% of investors share this sentiment, while another found that only 36% of adults feel most financial firms are honest and transparent.
To address this, the UK’s Financial Conduct Authority (FCA) has been working on a variety of rules for clear, transparent, and honest communication around sustainability. Financial firms are likely familiar with previous guidance, but upcoming enforcement dates will require a closer look.
Here’s what’s changing, who’s impacted, and why it matters.
The trouble with greenwashing
“Greenwashing” can be defined in many ways. For financial firms, the most relevant description is this: false or misleading claims about the environmental impacts of a particular offering.
Such activity complicates genuine environmental, social, and governance (ESG) efforts, delaying valuable activity and undermining consumer trust in the process. It also results in million-dollar penalties and complicated legal action that may lead to increased scrutiny and tighter regulations for all firms.
Entities across the globe, including the Australian Securities and Investments Commission (ASIC) and the U.S. Securities and Exchange Commission, have released regulations intended to prevent various types of greenwashing in the financial services industry. Depending on where and what they market, UK firms may have to be aware of these rules and the FCA’s latest guidance.
An update to green guidance in the UK
In November 2023, the FCA released an extensive policy statement: “Sustainability Disclosure Requirements (SDR) and investment labels.” The document outlined a growing emphasis on ESG in finance, particularly investments. It also discussed issues including a lack of standardised information and potentially misleading or exaggerated claims. To address this, the FCA designed the SDR with a simple goal: ensuring that financial products marketed as sustainable will “do as they claim and have the evidence to back it up.”
While financial firms will still need to understand the SDR, the FCA has recently released updated guidance that helps clarify its expectations and enforcement, including a section addressing frequently asked questions. Firms can refer back to this information throughout 2024 as different regulations come into force.
What are the rules?
The FCA outlines a few main areas of focus.
Anti-greenwashing rule
This blanket rule came into effect on 31 May 2024. It ensures firms are only making “fair, clear, and not misleading” claims regarding sustainability. Such claims must also be “proportionate to the sustainability profile of the product and service.” The rule applies to communications and materials for a UK audience, regardless of whether the audience is retail or commercial, and includes communications made or approved by authorised firms on behalf of unauthorised firms outside the UK.
Investment labels
From 31 July, firms can start using one of the four new investment labels introduced by the FCA:
- Sustainability Impact TM
- Sustainability Improvers TM
- Sustainability Focus TM
- Sustainability Mixed Goals TM
Each represents a different sustainability objective and approach to pursuing it. These approaches can be indirect (Sustainability Focus and Sustainability Improvers), direct (Sustainability Impact), or both (Sustainability Mixed Goals.) Products with similar assets may have different labels.
These labels communicate that a firm has specific sustainability goals as part of its investment objectives. This highlights a commitment to high standards, including:
- Having clear, specific, and measurable sustainability goals.
- Using robust, evidence-based standards to measure ESG outcomes.
- Preventing any asset in the product mix from undermining the product’s overall sustainability objective.
- Meeting asset allocation benchmarks, including a requirement that 70% of a product’s assets must be invested in accordance with a particular objective before a label can be used.
Other requirements include clear key performance indicators, certain firm responsibilities, independent assessments, and plans for managing potential negative outcomes.
Firms are responsible for reviewing these and other requirements before using a label. The FCA says it must be notified when firms use, revise or rescind labels, but the FCA will not ‘approve’ these decisions.
Whether or not a product uses one of the new investment labels, the anti-greenwashing rule still applies. The naming and marketing rules specifically contemplate unlabelled products.
Naming and marketing rules
These rules for investment products ensure the accuracy and proper utilisation of sustainability-related terms in product names and marketing materials, specifically for retail clients. They will come into effect on 2 December 2024.
The rule restricts the use of terms such as ‘green’, ‘climate’, or ‘net-zero’ to products bearing one of the newly introduced investment labels. If the product does not bear an investment label, the use of the words ‘sustainable’, ‘sustainability’ or ‘impact’ are prohibited, and disclosures are required if any of the restricted terms are used.
However, there are some important exceptions, including:
- Non-sustainability contexts: Firms can use still terms like “economic climate” or “financial impact” when not referring to sustainability characteristics.
- Factual statements: Certain non-promotional, factual statements fall outside the scope of this rule. This doesn’t include sustainability-related statements promoted in marketing for product material, which still require disclosures and statements.
The FCA explains that these exceptions allow firms to use sustainability terms in reasonable, non-promotional ways; the rules specifically apply to financial promotions of a product’s sustainability characteristics.
The anti-greenwashing rule forms the foundation of the naming and marketing rules but has a larger scope and has already come into effect. As such, even after 2 December 2024, even when firms are using sustainability terms in the permitted exceptions (non-sustainability contexts or factual statements), they must still consider their obligations under the anti-greenwashing rule and the Consumer Duty, where applicable.
Additional information and guidelines
The new rules introduce additional communication and disclosure requirements:
- For consumers: This consumer-facing information is intended to help the general public better understand a product’s key sustainability features.
- For investments: Institutional investors and consumers will get information in pre-contractual, ongoing product-level, and entry-level disclosures.
- For distributors: Clear requirements will help distributors provide complete product-level information, including labels, to consumers.
Who is affected?
All FCA-authorised firms need to be familiar with these guidelines, because some may apply while others don’t. Here’s how the FCA breaks it down:
All authorised firms
The anti-greenwashing rule applies to every FCA-authorised firm. If an organisation makes any claim about the sustainability of its offerings, it will need to review the rule to ensure fair, clear, and straightforward language. The FCA recommends reading the accompanying non-handbook guidance for a closer look at the specifics.
All distributors
All distributors must make labels and consumer-facing disclosures available “as soon as reasonably practicable” after the firm produces them. This includes a requirement to keep all labels and disclosures up-to-date based on any changes within the firm. Distributors of overseas funds will also need to add notices clarifying which of the products they promote are not subject to the FCA’s rules.
UK asset managers
UK asset managers are expected to familiarise themselves with the requirements in time to implement changes ahead of the communicated deadlines. Considerations include:
- Whether they want to use the new labels.
- Which products, if any, meet each label’s criteria.
- How to update consumer-facing and detailed product-level disclosures accordingly.
- When and how to notify the FCA of label use.
- What needs to happen regarding annual reviews, label changes, etc.
What do firms need to know?
To ensure compliance, every firm needs to be aware of key details:
Timing
Each part of the SDR has different timing:
- The anti-greenwashing rule came into effect on 31 May 2024.
- Firms can start using labels on 31 July 2024.
- The naming and marketing rules go into effect on 2 December 2024 but if firms are releasing new offerings before this date, they should consider proactively complying.
Enforcement
While the FCA has clarified that its guidance and examples are not exhaustive and that it won’t be approving steps like label usage, the regulator will still enforce every part of the SDR. This is particularly relevant in three areas:
- Relevance: Firms must know which rules apply to their activities and offerings.
- Timing: The FCA expects compliance as soon as each rule goes into effect; firms shouldn’t wait until these dates to start working on compliance policies and procedures.
- Specifics: Some parts of the SDR, particularly concerning labels, require firms to pay close attention to specific requirements and criteria. Compliance is based at least partially on self-assessment.
Next steps in ensuring compliance
The SDR is intended to create a more honest, trustworthy, transparent market, which will benefit financial institutions and their clients. However, this means firms like yours will need to reevaluate their offerings and related language.
Here are three easy steps to help you ensure compliance:
#1: Determine what’s relevant
First, you need to understand the SDR and how it applies to you. You’ll use this information to identify which policies, products, and offerings need a compliance check or update.
#2: Choose your tools
Multiple teams are involved with the consumer-facing elements of your work, which means they must be part of your SDR compliance efforts. To get the right information to the right people, you need tools that automate and simplify marketing compliance.
Red Marker helps you maintain consistently correct disclosures in line with each relevant part of the SDR. From unsubstantiated claims to restricted ESG language, Red Marker helps you navigate this and other regulatory requirements with confidence — even while juggling different departments’ priorities (like creativity vs. compliance).
#3: Prioritize consistency and accuracy
Once your tools are in place, it’s time to ensure consistency and accuracy become priorities in every process. This doesn’t just help you align with SDR requirements when labeling and marketing your products; it also creates a framework for future decision-making, like brainstorming new offerings or campaigns.
Make compliance easier than ever
The SDR is an important part of the UK’s commitment to a more sustainable future, but it’s certainly not the only requirement in the financial services sector. Organisations like yours will need to maintain clear, fair, and trustworthy language in everything they do — and thanks to pressures like regulatory change and interdepartmental conflict, this can be a challenge.
It’s time to leverage technology to automate and scale review processes, empowering your teams and optimising resource for your organisation. Contact us today to see how Red Marker can do all this and more.