Enforcement risk rises for UK financial services firms over 'greenwashing'

At COP26, it was announced that the UK will be the world's first net-zero aligned financial centre. In light of the role of the Financial Services (FS) sector in the drive to net-zero, we examine the UK perspective on greenwashing litigation and enforcement risk for financial services firms.

Increasing focus on greenwashing 

There has been significant growth in ESG and "green" investments , frequently accompanied by loud and proud targets and credentials. But increasing attention is being paid, by both regulators and activists, as to whether environmental claims are inaccurate or misleading.

While the environmental reporting requirements for the FS sector and listed businesses are relatively immature and unlikely to be the focus for enforcement action in the short-term, there are tools that both the Financial Conduct Authority (FCA) and disgruntled investors can utilise to hold firms and listed companies to account if they are suspected of "greenwashing" (making unsubstantiated "green" claims).  

FCA principles

From an FCA perspective, the most obvious place to start is Principle 7 (communications must be clear, fair and not misleading). Firms that market "green" financial products in a misleading way are exposed to regulatory enforcement under this principle. There are, of course, a suite of supporting FCA Handbook rules and guidance concerning the way financial products should be sold that are applicable to green claims.

For fund managers, the FCA has published an overarching principle and three supporting principles for sustainable investment. The principles are intended to be "complementary" to the EU Sustainable Finance Disclosure Regulation (SFDR) regime. ESG claims must accurately reflect the nature of the fund's strategy from the fund's name, stated objectives, documented investment policy and strategy, through to its holdings.  At present, greenwashing by fund managers is likely to be dealt with by the FCA through existing rules and principles, such as Principle 7.  

Climate-related financial disclosures

Aside from this developing regulatory regime concerning products that are actively marketed as "green", there is a push for increasing numbers of regulated firms and companies to publish climate-related financial disclosures, enabling investors to make informed decisions about investing by reference to sustainability and other ESG metrics.

The anticipated Sustainability Disclosure Requirements (SDR) were a notable absence from this year's Queen's Speech and appear to have been delayed. Nevertheless, SDR and a full UK Green Taxonomy are likely to be implemented within the next few years which will provide a much more comprehensive disclosure regime.

Task Force on Climate-Related Financial Disclosures (TCFD) aligned disclosure requirements are already in place for premium listed companies and by 2025 this will be expanded to include all UK registered companies. This is on a "comply or explain" basis; however, if a listed company fails to include the required TCFD-related statement in its annual financial report, the FCA will request that it publishes the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after discovery. Any non-compliance, as well as attracting negative press attention, will be viewed seriously and will lead to action using the full set of FCA powers and, where appropriate, sanctions. (For more on this, see our earlier Insight.)

The FCA's ESG Sourcebook sets out mandatory disclosures at entity and product level for asset managers, life insurers and regulated pension providers. There is a transition period and the FCA has acknowledged firms may face "data and methodological challenges" in complying during this period.  Nevertheless, there will come a point in the near future when the FCA will start actively enforcing its ESG compliance regime. 

Standardised data

The FCA has recently announced its intention to regulate ESG data and ratings providers (and potentially verifiers and second party opinion providers). The intention is to create "common baseline standards" so that investors and other market participants can be confident that ESG data is reliable and standardised. 

Osborne Clarke comment

Against this backdrop, enforcement action is a risk and something for all in the FS sector (including listed businesses) to be alive to. Pressure groups, such as Client Earth, are already using the FCA disclosure requirements to initiate complaints to the FCA when they consider companies to be in breach.

Regulated firms and listed business should be careful not to overstate ESG credentials and should thoroughly review all "green" claims and assertions. The evolving regulatory and legal landscape is significantly increasing the risk of enforcement and litigation. Activist shareholders, investor groups and pressure groups are all actively exploring legal and regulatory avenues to holding perceived greenwashers to account.       

If you would like to discuss the issues raised in this Insight further, please do not hesitate to contact the experts listed below or your usual Osborne Clarke contact.