This is a transcript of the podcast episode David Berman and Emily Lemaire on Greenwashing between Covington lawyers David Berman and Emily Lemaire and GRIP commissioning editor Jean Hurley.
[INTRO]
Jean Hurley: Thank you both for coming. What would be great if you could just introduce yourselves for our audience?
Emily Lemaire: Of course, I’m Emily. I’m an associate in Covington and Burling’s financial services team in London.
David Berman: And I’m David Berman, a partner in the financial services team based in London.
Jean Hurley: Thank you. So we’re here today to talk about greenwashing and the new anti-greenwashing rule. So we all know it came into force at the end of last month, and it applies to FCA authorized firms. Can you please give us a short overview?
Emily Lemaire: Of course, so as you say, the anti-greenwashing rule under the ESG sourcebook came into force on the 31st of May, and effectively just stipulates that firms must ensure that any claims that they make regarding the sustainability characteristics, be it environmental or social, of a product or service must be accurate.
So that product or service actually has to have those characteristics and be fair, clear, not misleading. And again, as you said before, this applies to all firms and all firm communications with the UK client, irrespective of their categorization regarding that firm’s product or service. And when I say all communications, this encompasses both service or non-promotional communications, as well as financial promotions.
So think of your marketing decks, but also your in-person communications about a particular product or service, any scripts being followed, periodic ESG reports, et cetera. And now that rule needs to be read alongside the FCA’s finalized guidance on the anti-greenwashing rule as well.
It sets out the regulatory expectations for how firms should be applying the rules. The key takeaways there are that sustainability claims and references need to be correct and capable of being substantiated. They should be clear and presented in a way that is reasonably likely to be understood by your audience. Keeping it in mind for retail consumers that you’ve still got the consumer duty in the background as well with a higher threshold for consumer understanding.
Your claims or references should be complete. So you shouldn’t be cherry picking the benefits while keeping quiet on the whole context or indeed the risk of the product or service, so really giving a representative view of the product or service. And be fair and meaningful when you’re making comparisons to other products or services. And this also includes comparisons against the firm’s own products or services.
Jean Hurley: Thank you. Have you found, now the rule’s in force and your clients are looking at their current marketing practices, that there’s been some things that they’ve been missing or you’ve got any advice to people that they should be doing now?
David Berman: I mean, I think, and I’m sure we’ll come onto this a little bit later, I’m not expecting firms to have to need to sort of radically or have radically overhauled their controls, their relevant controls around, you know, communications and statements that they’re putting out. But I do think that the new rules and the new guidance are a little bit more nuanced and do need some more thought put to them.
So as Emily mentioned, a firm could make a technically correct statement about a product. Okay. But that’s not necessarily the end of the story, because if that is only half of the story and there are other factors in the background that make that factually true statement actually a little bit misleading in some way, then that would fall foul of the rules as well.
So in other words, you need to look at the totality of the situation. And Emily’s mentioned the term already cherry picking.
You know, not cherry picking. We’ve seen some firms already taken to account for conveniently cherry picking the good stuff and conveniently omitting the not so good stuff so as to give a net positive portrayal, which is something that the regulators absolutely do not want to see. So I think it’s just another lens. It’s a more nuanced lens to look at this topic from. It’s not just about saying, can we hand on heart verify the factual accuracy of this particular statement?
That might be an overly narrow way of looking at it. Of course you need to do that. But at the same time, you also need to be standing back a little bit and thinking, okay, might this nevertheless be misleading in light of the broader context here? And you need somebody there asking that type of question, which is not necessarily at the level of detail that somebody might have asked previously.
Emily Lemaire: Just to add to that, I think it’s worth saying that last year’s consultation on the rule and the guidance, whilst that implied very little lift work on behalf of firms and the FCA actually stated that I expected minimal additional burden on firms. But that language is kind of noticeably absent in the finalized guidance and rather the FCA is expecting any good, cautious, well-prepared firm to have done a full audit of any live campaigns and communications, their website, and for retail firms to also be overlaying the Consumer Duty obligations under consumer understanding as well.
You’re thinking about things like imagery being used. Is this consistent with this product or service or is it giving an impression even through the overuse of greens or yellows of environmental sustainability? So it really is about striking that balance, a very fine balance between kind of “green hushing” and where firms try to avoid any mention of anything related to sustainability for fear of breaching a requirement or being overzealous about green benefits. Really kind of stepping back and looking at the representative picture as David’s saying.
Jean Hurley: Thank you. So it does seem a lot more far-ranging than people thought it might have started off as. So now looking at FCA enforcement, do you think this could be a big area coming forward and have you heard any rumors whether the FCA are investigating any firms?
Emily Lemaire: So we’d expect this certainly to be a future avenue for enforcement. I think there are two overarching reasons for that. I mean first firms’ marketing and communications is certainly an area where we’re seeing increased regulatory focus. It’s just evident by looking at their financial promotions data as well as the rhetoric around firms marketing practices.
There’s a real concern that clients both retail and professional alike are just not getting the full representative picture of in firms communications. And then secondly ESG is a real focus for the FCA supervisory strategy and you know the fact that the anti-greenwashing rule was developed with extensive stakeholder consultation. The FCA rejected calls to extend the implementation by six months. So it might be unlikely that the regulator is sympathetic to firms not having properly implemented the rule or be complying with it now that it’s enforced as to. Whether they enforce the rule regarding bluewashing in the short to medium term that I guess remains to be seen. David I don’t know if you have thoughts on that.
David Berman: I think from an FCA enforcement perspective I would prudently assume that they will bring some cases in the in the fulness of time. There was one aspect that I did want to just sort of draw out and that perhaps doesn’t highlight itself as much as it might do from the FCA’s guidance. A lot of the focus and the anti-greenwashing rule itself is on the products and services so statements made about products a firm’s products and services. There is however some interesting commentary in the guidance and I’m going to just recite it now because I think it’s quite interesting.
Firms should consider what information is necessary to include for the claim to give a representative picture of the product or service and that’s basically as we’ve just been discussing. Firms should also consider whether information about the firm itself may be considered part of the representative picture of a product or service.
It is important that those claims meet the relevant rules and expectations so that the overall picture is fair, clear and not misleading. Firms are subject to other rules and expectations regarding the claims firms make about themselves and other firm level disclosures but should nevertheless take into account how firm level claims may be considered as part of the representative picture in a decision making process.
So just standing back from that for a second, for me this is a very clear marker that the regulator is putting down along the lines of don’t think that all we’re going to be focusing on are product and service related communications that you’re making. We are also going to be looking at firm related claims that you are making because those firm related claims may well be seen by somebody who’s going to be acting on those you know making decisions or investment decisions or customer decisions.
Those firm related claims may well be influencing a consumer’s ultimate choice as to whether or not to invest in a particular firm’s product. So the sort of the takeaway from that is that in my view firms should be giving just as much consideration and care and have as much control over and oversight over firm related communications that that are being made as well as over products and services and when I say firm related communications I don’t just mean on their website in their marketing literature and other promotional literature but I also mean inward facing too you know firm claims that are being made facing employees claims that they’re making towards their employees too.
I think all of those types of firm level claims great care does need to be taken. The other point just to finish off you know we are the realities that we’re operating in an environment at the moment where many firms are feeling almost compelled to be saying certain things and to be seen to be taking certain positions. I understand that but that may be compounding the issue in that you know firms are perhaps not taking as much care as they might do in making you know in the claims that they are making about themselves.
Just to give you a concrete example we saw one example recently of a large financial services institution who made a claim on their website that they take sustainability considerations into account in every decision they make which cannot be true right, on any basic level that is clearly not true. So practically speaking in short, the rule is if you can’t substantiate it, if you’re not monitoring it, and you’re not tracking it, you shouldn’t be saying it.
Jean Hurley: Thank you and is this what you were saying Emily is called blue washing?
Emily Lemaire: Yes correct.
Jean Hurley: So there could be a lot more enforcement action around it, so not just from the FCA then it could be from employees, is that what you’re saying? If they’ve gone to a company thinking it’s going to be one type of company and it isn’t and they don’t live up to their sustainability claims is that right?
David Berman: Yeah I mean you could see a disaffected employee perhaps you know raising an argument along those lines. I’m not necessarily suggesting that they they would have a sound legal cause of action in a case like that but that doesn’t mean to say that they couldn’t cause mischief and and you know make embarrassing noises nonetheless.
So again the regulator is very clear, we know why firms choose to make these claims okay, they make them with a view to making themselves look good and attractive and that’s fine provided that though they’re not just puffery not just mere empty words but that there is actual real substance behind them and that they are being tracked and monitored because if they’re not then all you’re left with is just the bare words that you know they’re not worth the paper they’re written on and that is playing into the hands of third parties, or interested stakeholders – whether they’re employees, whether they’re NGOs, whether they’re lobby groups, disgruntled shareholders whoever they may be.
Jean Hurley: Thank you so blue washing could also be covered by other regulators such as the Advertising Standards Authority, have you seen any claims around that at the moment?
Emily Lemaire: So yeah I think the UK Advertising Standards Authority’s CAP and BCAP code do cover and have specific requirements to do with environmental claims but I think broadly the US, UK and EU all have general laws that prohibit unfair commercial practices against consumers and other businesses which would capture bluewashing.
The FCA guidance is meant to align with the ASA CAP and BCAP code as well as the CMA’s green claims code but that’s basically to say that whilst we have these regimes that broadly do cover bluewashing we’re just seeing now a trajectory where the financial services regulators like the UK FCA are taking up the baton to regulate green and blue washing and they’ve said that the anti-green washing rule whilst it’s meant to be applied consistently, you might be asking what’s the difference between those rules the guidance under CMA what’s special about the FCA’s anti-green washing rule or even in the EU.
The ASA is having increasing attention on green and blue washing and I guess the answer to that is you know with financial services regulators paying more attention to this, there is a possibility of increased regulatory scrutiny and burdens imposed on those regulated entities and I guess in the more extreme situations in the long term a risk of losing the rights a firm has as a regulated entity or even its status as a regulated entity entirely depending on how bad their claims would be and whether or not they they were able to substantiate those.
Jean Hurley: Thank you, so with all this global scrutiny and potential damages for reputational damage as well, do you see it as a global issue and how would you advise firms should be looking at this? I think before, when we talked, you mentioned governance – maybe that’s where you should start – right at the top?
David Berman: I think that in an ideal world, that’s where you would start. Again the ideal solution I think to this global conundrum it is very much a global issue is as you know in an ideal world large global financial institutions would have some sort of overarching enterprise-wide greenwashing framework which imposes minimum standards across the piece, ensures a good degree of coherence and consistency across jurisdictions where there may be some local specific rules they could be acknowledged in schedules to that overarching framework.
But actually when you stand back from this without getting too bogged down in technical detail, you know you stand back and you think well whichever regime you’re looking at whether it’s the advertising regime or the financial services regime or the competition markets regime, you can actually, I think, boil down requirements to certain golden principles if you like or golden rules and you know without being too prescriptive about it those rules would go something along the following lines “all communications made whether they related to products or services or indeed to the firm itself must be fair, clear not misleading”.
You’d give some illustrative examples of what that means and that they would include “thou shall not cherry pick”. That’s not going to be acceptable. You’d also have a golden rule along the lines of we shouldn’t be saying anything that we can’t substantiate, that we’re not monitoring and we’re not intending to track and actually even just with those two sort of golden principles you know there wouldn’t be much left, I don’t think, in terms of you know if you were faithful to those those key golden principles the chances are that that you know you’re going to be compliant with the various applicable rules etc. I mean there may be some specifics in there but that you know in terms of a global standard golden rules of that type that nature I think would work very well.
Jean Hurley: Do you think AI will be a useful tool in looking for instances of greenwashing?
David Berman: I think “possibly” is the answer depending on its capabilities. I mean you know just go back to what we were saying earlier about the nuance here, the question is how sophisticated is the AI? Can the AI be programmed? And maybe the answer is yes but if the AI can be programmed to pick up on cherry picking type claims that are being made – great. But I think it would need to be you know need to be analyzed through that type of lens. Is it capable of picking up on you know some of the more nuanced potential issues that that can arise here?
Jean Hurley: Thank you. That’s a very fair point I think most people say that about AI – it’s not quite there yet and you still need the human impact.
With regards to bluewashing, how about in Europe and the US: they have an EU sustainability finance framework and then the US has the Marketing Rule.
Emily Lemaire: The UK, US and EU all have general laws that prohibit unfair commercial practices against consumers and other business which would capture bluewashing. So in the EU we’ve got the unfair commercial practices directive and the misleading and comparative advertising directive and in the US you’ve got the FTC act. The EU and certain states like California in the US are also extending those laws with standalone requirements applicable specifically to green claims whether those relate to a product or service or to an entity itself.
So in the EU for example, we’re seeing we’ve got the greenwashing directive which member states need to apply locally from the end of September in 2026 and also the forthcoming green claims directive which is still in the early stages of the legislative process but will apply onerous requirements on what they’re calling explicit green claims: so labels or texts that are actually making those environmental claims including about the firm as a whole itself, the commitments it’s making, or what it has achieved in terms of net zero emissions etc. But I think, as I said before, we’re seeing a trajectory towards financial services regulators like the FCA now regulating anti-green washing and possibly bluewashing – we’ll see what’s to come with that.
Jean Hurley: Great, thank you. Thank you so much for your time.
