Asset managers must now comply with a further piece of ESG regulation, in the form of the new Anti-Greenwashing Rule (AGR), Rule ESG 4.3.1 of the FCA Handbook, which came into effect on 31st May 2024. The AGR introduces several risks which, if not effectively managed, could result in potential fines, enforcement action, and reputational harm.
The Anti Greenwashing Rule
The AGR applies to all FCA authorised firms or individuals who communicate with clients or approve promotions for communication in the UK. It requires that any reference within those communications or promotions to sustainability characteristics of a product be (a) consistent with the actual sustainability characteristics of the product and (b) fair, clear and not misleading.
The scope of the AGR is very broad. It applies to any kind of communication with a client and to promotions which invite or induce engagement in investment activity, and is not restricted to retail clients. The draft guidance suggests that images, logos and even colours would form an important part of the overall presentation of a sustainability claim.
The AGR is one component of the FCA’s sustainability disclosure and labelling regime (opens a new window), further parts of which such as investment labels will come into force over the period 2024-26. It is also to be interpreted through the lens of the Consumer Duty (opens a new window) in instances where that applies.
FCA guidance
Asset managers are strongly advised to familiarise themselves with the FCA’s finalised guidance on the AGR (opens a new window), which includes helpful examples of how the AGR is expected to work in practice.
There are four components to the guidance:
Claims about sustainability should be correct and capable of being substantiated;
They should be clear and presented in a way that can be understood;
They should be complete – they should not omit or hide important information; and
Any comparisons used should be fair and meaningful.
Although these requirements might seem fairly self-explanatory, the detail of the guidance shows they are far from straightforward.
Risks for asset managers
For example, when making “factually correct” statements (in line with the first requirement), asset managers will have to be cautious about differing assessment methods of sustainability, continuing improvements in technology, and the reliability of third parties’ statements about their own sustainability.
Asset managers will also need to take a subjective approach to the guidance, in that they are to consider (in complying with the third requirement) what information might influence a particular client’s decision-making, and whether there are particular parts of the product’s lifecycle in which a client would be more likely to be interested. This risks uncertainty for asset managers, as it’s unclear how far an asset manager would be expected to look into each client’s particular goals or priorities in order to have given them adequate consideration to meet the requirement.
To mitigate these risks, asset managers should:
Ensure they are able to support any claims with robust, relevant, and credible evidence at the point in time at which they are made
Regularly review their claims and any supporting evidence, to ensure that the evidence still supports those claims
Familiarise themselves with the requirements of the guidance and keep contemporaneous records of the consideration they have given to them in each instance
Ensure the requirements of the guidance are built into the firm’s procedures to avoid being missed and ensure ongoing compliance
Conduct regular reviews of clients’ needs
Penalties and enforcement
The AGR came into effect on 31st May 2024. The FCA will apply its usual supervisory and enforcement approaches, which can range from financial penalties and public censure to investor redress and even restrictions on a firm’s operations. Whether any of these costs or loss would be covered by insurance would depend on the terms of the policy and the legal insurability of the penalty.
There are also reputational risks to consider, which may be more expensive than any financial penalty. As above, asset managers would do well to review the guidance and make sure that they are in a position to comply with it.
For more relevant information for asset managers, visit our Financial Institutions (opens a new window) page.
