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In November 2023, Financial Conduct Authority issued a consultation (G23/3) seeking input to set expectations for any FCA-authorised firm that makes claims about the sustainability of a product or service. The consultation has now closed and guidance is intended to come into effect from 31 May 2024.

FCA remarked that 74% of adults surveyed agreed that environmental issues are really important to them. As the demand for sustainable products and services continues to grow, so does the risk of ‘greenwashing’. As firms increasingly make sustainability-related claims about their products and services, there are some concerns that some of these may be exaggerated, misleading, and unsubstantiated claims that ultimately do not stand up to scrutiny. FCA stated that tackling greenwashing is a regulatory priority for them.

Seven examples are provided in the consultation of misleading behaviour, being that a firm:

1. Makes a promotional statement that an investment fund is ‘fossil fuel free’ but underlying investments include companies involved in the production and sale of fossil fuels
2. Claim that all investments are reviewed for their sustainability characteristics, even if such characteristics are not actually a significant factor
3. Imagery e.g. of a rainforest, which overlay text such ‘Sustainable Savings’
4. Promotes its ‘Green bonds – greening the planet’ but some activities include projects to improve the energy efficiency of fossil fuel production and distribution
5. Claims to be ‘sustainable’, by excluding companies with ESG ratings ‘lower than 3’ but does not specify what the rating is based on or provide references to “ESG ratings”
6. Promotes the UK’s Greenest Car Insurance’ but without making it clear how this conclusion was reached and what comparisons this claim is based upon.
7. Claims that by purchasing their investment bond, investors will ‘reduce emissions’ but does not make it clear to its audience that this comparison refers only to Scope 1 emissions (as opposed to all emissions – Scope 1, 2 and 3) and was based on a limited sample.

The FCA’s anti-greenwashing rule, in the Environmental, Social and Governance sourcebook (ESG) 4.3.1R, requires that a firm must 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 fair, clear and not misleading. The consultation proposes to go further that claims should be:
• Correct and capable of being substantiated
• Clear and presented in a way that can be understood
• Complete – should not omit or hide important information and should consider the full life-cycle of the product or service
• Fair and meaningful in relation to comparisons to other products and services

Whilst the FCA rules apply to authorised firms about investment products, it should be expected that there will be an extension to auditing firms that will apply the same principles in the performance of their duties of oversight of Statements of Energy and Carbon Reporting in businesses’ annual financial statements to ensure that they are substantiated, not misleading and are complete.