On 31 May 2024, a new anti-greenwashing rule is being introduced by the Financial Conduct Authority (the “FCA”) as part of its Sustainability Disclosure Requirements (“SDR”). We cover here the introduction of the FCA’s anti-greenwashing rule and apply a legal lens on some key risk points to consider in the asset management sector.

What is greenwashing?

Greenwashing is generally considered to be where a sustainability-related statement or action does not clearly or fairly reflect the underlying sustainability profile of an entity, product or service and could be misleading to others as a result.

The fertile ground for greenwashing has arisen from the convergence of multiple evolving factors from market expectations, regulatory requirements, supervisory oversight, data quality, quantity and availability and methodological aspects of ESG. Combined, these have created an environment where greenwashing can quite readily take place – even if unintentional.

The anti-greenwashing rule and its applicability

The anti-greenwashing rule requires all FCA authorised firms to ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service, and is fair, clear and not misleading.

The FCA Guidance on the anti-greenwashing rule published 23 April 2024 (FG23/3), (the “FCA Guidance”) sets out that the rule applies when a firm:

  • communicates with clients in the UK in relation to a product or service; or
  • communicates a financial promotion (or approves a financial promotion for communication) to a person in the UK.

All sustainability references are advised in the FCA Guidance to be:

  • correct and capable of being substantiated;
  • clear and presented in a way that can be understood;
  • complete, in that they should not omit or hide important information and should consider the full life cycle of the product or service; and
  • comparisons to other products or services are fair and meaningful.

The territoriality of the rule means that it does not apply to any non-UK firms that are not authorized by the FCA, for example, an asset manager marketing a fund into the UK, and also does not apply to communications made to clients outside the UK, for example, non-UK investors.

The range of communications captured is extremely broad and includes ‘references to sustainability characteristics could be present in (but are not limited to) communications that include statements, assertions, strategies, targets, policies, information, and images relating to a product or service’.

The communications captured are not restricted to those made to retail customers but also capture a broader audience in what the FCA describes in its guidance as “business-to-business”.

Examples of good practice

The FCA has included examples of good practice in its FCA Guidance, which can be utilized in the review of controls and procedures, we reference under ‘Market commentary’ below:

  • Clear Standards: Firms should set clear and robust standards for sustainability characteristics.
  • Continuous Monitoring: Regularly monitor and assess the accuracy of sustainability claims.
  • Transparent Marketing Materials: Ensure that marketing materials provide clear explanations of sustainability features.

Market commentary

There has been some criticism that the FCA Guidance, which is principles-based rather than prescriptive, has been published a little over a month before the introduction of the anti-greenwashing rule and that, as a result, firms have little time to prepare, and there should be a delay to its implementation.

This is somewhat counterbalanced, with other commentary having described the anti-greenwashing rule as a specific detailed bolt-on to the clear, fair and not misleading rules already applicable to FCA authorized firms. In particular, all FCA authorized firms must comply with the high level FCA Principle 7 which includes the requirement to ‘communicate information to them in a way which is clear, fair and not misleading’.

There is merit to both views, but regardless of the position on the timing of the FCA Guidance, there is a general consensus that existing controls and procedures on sustainability-related communications should be reviewed in light of the new rule, which could include:

  • processes for approving sustainability-related claims or imagery, regardless of the type of document or digital location;
  • development of a sustainability-related definitions bank – as there is such broad and, in some cases, interchangeable or similar terminology that can be used, establishing an in-house agreed list of definitions could mitigate any divergent approaches in use of sustainability-related terms and promote consistency; and
  • enhanced training programmes and logs on sustainability-related matters across relevant personnel, such as boards, legal, compliance, risk and investment teams, beyond any sustainability teams themselves.

A legal lens

Penalties for failing to comply with the FCA’s anti-greenwashing rules can be significant and vary depending on the seriousness of the breach. The FCA regulatory enforcement action could include fines, restrictions or prohibitions, or the requirement to withdraw the communications/documents that are found to have been “greenwashed”. Where there is any regulatory enforcement action, this is likely to provide a base for litigation action. This risk may also increase if the FCA’s proposed “naming and shaming” regime comes to fruition where firms that are under FCA investigation may be named by the FCA ahead of any investigation/enforcement outcomes. In this context this could mean where there is an opening of an investigation with regards to a firm’s compliance with the anti-greenwashing rule they may be named publicly – for investors, activist litigators and their stakeholders to be aware of – even if the FCA concludes that it will not pursue any enforcement action as a result of the investigation.

With regards to litigation, generally investors or other affected parties may consider pursuing separate civil claims against the firm who have relied on the “greenwashed” communications/documents or they may potentially have a claim for damages under section 138D of the Financial Services and Markets Act 2000 where they have suffered a loss as a result of a breach of the anti-greenwashing rule.

We recommend the following three steps are considered as early action points or to be refreshed if already carried out, with regards to the litigation and regulatory enforcement risk for the asset management sector:

1. Review and monitor ESG obligations in contracts:

  • We increasingly see bespoke ESG-related provisions (targets, investment restrictions or data/reporting) in fund documentation, whether in side letters, delegated investment management or advisory agreements. There is a risk that these commitments may receive less attention than more commercial, financial commitments. There is also an emerging trend for more ESG provisions to be included – or at least requested – in limited partnership agreements.
  • However, given the bespoke nature of many of these provisions, the complexity of relevant national and international regulations and practical challenges (such as accurate data collection), seeking advice – both internal and external – is crucial. Lawyers and sustainability teams can help ensure proportionate language that reflects realistic deliverables, so as to minimise future litigation risks.
  • Maintaining robust logs and monitoring ongoing reporting obligations between asset managers and other parties – whether third-party AIFMs, delegated investment managers, or investors – serves as a preventive measure to ensure alignment between contractual agreements and actual delivery. This helps minimize any potential gaps.
  • If there is any challenge or investigation by the FCA under the anti-greenwashing rule, interested parties will naturally turn to their own contractually agreed ESG obligations to understand whether they may not be met or have not been met historically. Further, given the public focus on the issue, counterparties may see ESG-related breaches as a useful addition to a broader claim for other breaches of duty or a lever to renegotiate terms.

2. Align fund marketing disclosures:

  • Whilst the Sustainable Finance Disclosure Regulation (the “SFDR”) may not be directly applicable in the UK, there are many funds that are marketed in both the UK and the EU and therefore have SFDR disclosures. Whilst the SFDR itself is in a state of development with its wholesale consultation as we covered in our update here, there has been a growing emergence of comfort by some financial market participants of the type and content of disclosures that are required. This is particularly in the case of the broad spectrum of Article 8 funds which promote environmental and/or social characteristics. On some occasions significant sections of SFDR disclosures are recycled for new investment funds, with no reference to the latest European Commission or ESMA Guidance and therefore may have disclosures that are not applicable to that investment strategy or no longer meet regulatory expectations. Ensuring there are bespoke, up-to-date disclosures drafted with the support of all relevant personnel, including legal, there can be mitigation against the risk that the SFDR disclosures – as core ESG-related marketing disclosures – may end up in the regulatory spotlight.
  • Sustainability teams in asset managers have grown substantially in recent years and approaches to investment strategies with regards to ESG considerations evolve with the development of personnel, technology and understanding. Where there is a material change to the approach taken in the sustainability-related strategy of a fund, rather than leave a disconnect between the disclosures made and the approach taken, a material change notification could be considered. There is no formal guidance with regards to SFDR and material changes from the European Commission or ESMA and therefore, it can depend on specific regulator expectations, which vary by jurisdiction, but nevertheless this could be a route to align what is said and what is done.

3. Be aware of directors’ duties:

  • There are a range of Companies Act 2006 claims that could be connected to greenwashing allegations and may be seized upon by claimants following any investigation from the regulator. These include:
    • Promotion of the success of the company for the benefit of the members (section 172, Companies Act 2006) — this duty on company directors (which includes investor appointed directors at portfolio companies) includes the requirement to have consideration to the long-term impact of their decisions and the company’s operations on community and the environment. At asset manager level, this duty could be connected to house level consideration and commitment to climate-related strategies or targets.
    • Exercise of reasonable skill, care and diligence (section 174, Companies Act 2006) – One example related to this directors’ duty and highlighting directors’ approaches is the requirement under the UK SDR for asset managers with assets under management of £5 billion or more to make disclosures in line with the Taskforce for Climate-related Financial Disclosures. This includes making public statements on the role of management in assessing and managing climate-related risks and opportunities.
    • False or misleading statements (section 463, Companies Act 2006) — with the increased entity-level reporting required under SDR and broader requirements under SFDR in the EU, directors could be in the spotlight and liable to a company if there are untrue or misleading statements in (or omissions from) their company reports.
  • With the increased level of entity-level statements in the public domain and required reporting under SDR, directors of asset managers are advised to be alert to the various ways in which greenwashing can occur and to ensure that management information and training is adequate to enable them to oversee sustainability related strategy. Following any regulatory scrutiny under the anti-greenwashing rule, activist litigators may seize on any doubts raised to pursue director duty claims.  Regardless of the legal hurdles to achieve a successful claim, they may consider this route for reputational impact to the asset manager alone and the regulatory investigation to be the ideal basis from which to launch their claim.

This is a legal snapshot of the matrix of sustainability-related requirements and factors that asset managers are required to navigate and how they are connected to the anti-greenwashing rule. For further information, including on any training support, please reach out to the Proskauer UK Regulatory team. 

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of John Verwey John Verwey

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients…

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients that range from small start-up fund managers to established global fund advisers and managers.

A particular area of focus for John is Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II).  This includes advising on pre-marketing and marketing strategies for fund managers, advising on the Level One and Lever Two requirements under AIFMD and implementing UK rules and legislation, and advising on the organizational and conduct of business requirements under MiFID II.

Photo of Dorothy Murray Dorothy Murray

Dorothy Murray is a partner in the Litigation Department specializing in investment and commercial dispute resolution. She supports clients across a wide range of sectors, including financial services, asset management/private equity, energy, telecoms, and maritime.

Dorothy represents clients in disputes arising from all…

Dorothy Murray is a partner in the Litigation Department specializing in investment and commercial dispute resolution. She supports clients across a wide range of sectors, including financial services, asset management/private equity, energy, telecoms, and maritime.

Dorothy represents clients in disputes arising from all aspects of their business, whether those disputes are post M&A, shareholder, employment, contractual, partnership or JV related.

Dorothy has experience managing litigation in common and civil law jurisdictions, and in commercial and investor state arbitration.  She is fluent with all the key divisions of the English High Courts and major arbitral institutional rules, including LCIA, ICC, LMAA, SCC, ISCID and UNICTRAL.  One of her particular interests is in the enforcement of arbitral awards.

In addition to representation in contentious matters, she uses her disputes experience to support clients at the transaction and pre‑action stages, working with companies and funds to identify, understand and mitigate personal and corporate liabilities and risks.

Photo of Rachel Lowe Rachel Lowe

Rachel E. Lowe is a special regulatory counsel in the Corporate Department and a member of the Private Investment Funds Group.

Rachel advises on financial services regulation specializing in sustainable finance and ESG regulation. She has particular expertise in drafting and advising on…

Rachel E. Lowe is a special regulatory counsel in the Corporate Department and a member of the Private Investment Funds Group.

Rachel advises on financial services regulation specializing in sustainable finance and ESG regulation. She has particular expertise in drafting and advising on the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. Rachel has also supported with EU MiFID and AIFMD sustainability updates for clients, including from a governance and organizational perspective, as well as providing drafting and training support. She also advises on the Corporate Sustainability Reporting Directive (CSRD), including analysis of its applicability for large international group structures.

From a UK perspective, Rachel supports clients with the TCFD-related requirements in the Financial Conduct Authority’s ESG Sourcebook and is increasingly engaged on the UK’s Sustainability Disclosure Requirements (SDR).

More broadly, Rachel has worked with litigation colleagues to assist clients with understanding and mitigating greenwashing-related legal and regulatory risk.

Photo of Amar Unadkat Amar Unadkat

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients…

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients on issues relating to the Alternative Investment Fund Managers Directive (“AIFMD”), the second Markets in Financial Instruments Directive (“MiFID II”), as well as the latest ESG developments. Amar also focusses on UK regulatory compliance matters, including the FCA’s change of control regime, the appointed representative regime and the Senior Managers & Certification Regime.

Amar’s clients include private equity firms, investment managers and advisers, firms in the FinTech space, wealth management businesses, banks and sovereign wealth funds.

Photo of Sulaiman Malik Sulaiman Malik

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers…

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers, as well as banks, FinTechs, broker-dealers and governments.

Prior to joining Proskauer, Sulaiman trained at Simmons & Simmons in London, where he was seconded to Brevan Howard. He has also spent time at the UK’s Ministry of Justice and as an adviser to the Mayor of Brisbane, in Australia.

Sulaiman is a passionate advocate for diversity and inclusion. He previously worked at Rare, a market-leading diversity consultancy, and provides pro bono legal advice to a range of community and civil rights organizations.

Photo of Michael Singh Michael Singh

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms…

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms, investment managers, FinTech companies and wealth management businesses.

He is dual-qualified as a German lawyer (“Rechtsanwalt”) and Solicitor of England and Wales and previously was in-house counsel at Deutsche Bank.