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The UK’s Financial Conduct Authority (FCA) has shed light on its greenwashing crackdown, confirming its intention to step up scrutiny on all financial services firms.

The regulator has opened up a consultation on fresh details relating to its anti-greenwashing rule, which applies to all regulated firms in the UK and is aimed at tackling ambiguous sustainability-linked claims in a firm’s communications, strategies and targets.

In guidance released yesterday, the FCA says environmental and social claims have to be “fair, clear and not misleading”, though it adds “we recognise that there is no single definition of ‘sustainability’”.

“We expect that firms’ sustainability-related claims about their products and services should live up to what they are claiming, and firms should have the evidence to back them up,” the FCA says.

The move follows mounting confusion over exactly what ‘sustainable’ means in the context of financial services.

Raza Naeem, financial regulation partner at Linklaters, says the rules “mark a significant milestone in the UK’s regulation of sustainable finance”.

“Significantly, the FCA has confirmed that the anti-greenwashing rule has a broad scope – given that it applies to all FCA-authorised firms,” adds James Morris, managing associate, financial regulation at Linklaters. “We can expect firms to have to work across multiple business lines and in areas not previously subject to ESG-specific regulation to ensure compliance with this new rule.”

While further clarification is welcome, Morris says it nonetheless “increases the regulatory risk for firms that make sustainability claims in their marketing” and will likely create “nervousness” among companies that are under increased pressure to make sure their green claims can be backed up.

The FCA wrote to ESG heads earlier this year and warned of “potential market integrity concerns” over misleading sustainability claims.

Sustainability-related claims should be “correct and capable of being substantiated” at the time they’re made as well as avoid omitting or hiding important information, with the full life cycle of the product in mind, the FCA notes.

If a firm uses terms like “climate”, “green”, “net zero”, “transition” or “responsible” to market a product, it has to make sure there is evidence to back up the claims.

The rules are part of the FCA’s sustainability disclosure requirements (SDR), which cover sustainable investment products.

Among the examples given by the FCA is a benchmark that claims to be sustainable “by excluding companies with ESG ratings ‘lower than 3’”.

To comply with the regulation, a company would have to specify what the rating aims to assess, the scale the rating uses, and the rationale behind choosing an ESG score of 3 as a threshold.

The rules will apply to firms from May 31 next year, though the FCA has made it clear that firms should already be taking action, Morris says.

The European Commission launched a similar consultation on the Sustainable Finance Disclosures Regulation (SFDR) in September, with disclosure requirements for sustainable products under review, again due to concerns around greenwashing.

“The FCA has clearly been thinking about the EU SFDR and reading the European Commission’s consultation on changes. However the UK rules very much go their own way and do not align with the EU’s rules,” says Morris.

“It will be interesting to see whether the EU authorities now react to what the FCA has done.”

Stakeholders can comment on whether they think the guidance clarifies the anti-greenwashing rule and if they agree with the proposed start date. The consultation is open until January 26, 2024.