What litigation risks for firms does the FCA’s anti-greenwashing rule and guidance create?

Guidance to help firms understand and comply with the new rule.

The FCA has recently published its finalised guidance on the anti-greenwashing rule, which will come into force on May 31, 2024. (See FCA confirms new UK guidance to counter greenwashing)

The anti-greenwashing rule, in the ESG Sourcebook, requires all FCA-authorized firms to ensure that any reference to the sustainability characteristics of a product or service is:

  1. consistent with the sustainability characteristics of the product or service, and
  2. fair, clear and not misleading. 

The guidance is intended to help firms understand and comply with the rule, by setting out the FCA’s expectations and providing examples of good and bad practice.

The anti-greenwashing rule and guidance apply to all FCA-authorized firms that communicate with clients or potential clients in the UK in relation to a product or service, or communicate or approve a financial promotion to a person in the UK. The rule covers references to environmental and/or social characteristics of a product or service, which could include statements, assertions, strategies, targets, policies, information, and images. 

The guidance is based on four core principles that sustainability references should be:

  1. correct and capable of being substantiated;
  2. clear and presented in a way that can be understood;
  3. complete and not omit or hide important information;
  4. and that comparisons should be fair and meaningful. 

The guidance illustrates these principles with examples of potentially misleading and good practice claims, covering different sectors and scenarios, including social as well as environmental matters.

The FCA has stated that it will take its usual supervisory and enforcement approaches, and may take action where it has reason to believe that there is risk of consumer harm or serious misconduct. 

Litigation risks

Therefore, firms should be aware of the potential litigation risks arising from the anti-greenwashing rule and guidance, both from the FCA and from other parties, such as consumers, investors, competitors, or non-governmental organizations.

Some of the possible litigation risks arising from the anti-greenwashing rule and guidance for firms are:

  • Breaching the anti-greenwashing rule and/or other FCA rules that require information to be fair, clear and not misleading, which could result in the FCA taking disciplinary or enforcement action against the firm, such as imposing fines, suspensions, restrictions, or prohibitions. The FCA may also require the firm to withdraw or amend any misleading claims or financial promotions, or to issue corrective statements or notifications to affected clients or potential clients.
  • Facing civil claims or complaints from consumers or investors who have relied on misleading or inaccurate sustainability-related claims or financial promotions, and have suffered loss or harm as a result. For example, consumers or investors may seek to recover damages, rescind contracts, or obtain injunctions or declarations from the firm, on the grounds of misrepresentation, breach of contract, negligence, or unfair trading practices. Consumers or investors may also bring complaints to the Financial Ombudsman Service (FOS), which could result in the firm having to pay compensation, redress, or refunds.
  • Private persons (in broad terms, individuals) may have a claim for damages under section 138D of the Financial Services and Markets Act 2000 (in addition to any common law cause of action that they may otherwise have).
  • Facing legal challenges or disputes from competitors or non-governmental organizations who have an interest in ensuring that sustainability-related claims or financial promotions are truthful and accurate, and that the market for sustainable products and services is fair and transparent.
  • The anti-greenwashing rule could also become a tool that is used by claimants to litigate against firms in an attempt to force firms to adjust their products and services to be aligned with an advocated sustainability agenda. 

Kushal Gandhi is a partner in the Finance Disputes team specialising in Finance and FinTech dispute resolution. Tom Dane is a partner and leads the Finance Disputes team in London. Laura Houët is a partner in the Financial Services and Products team and CMS’ Co-Head of ESG.