How should Managers prepare for the FCA’s anti-greenwashing rule? – Part One

In this two-part article, we discuss the Financial Conduct Authority’s (FCA) incoming anti-greenwashing rule and how it interplays with sustainability risk management more broadly.  In Part One, we explore what anti-greenwashing is and how sustainability risks are creating vulnerabilities for asset managers. In Part Two, we will delve into what asset managers can and must be doing now to take action and avoid unnecessary regulatory and reputational risks.

The effective date of the FCA’s anti-greenwashing rule is fast approaching – 31^st May this year.  At a high level, the rule covers all communications by FCA-regulated entities which refer to environmental or social characteristics of products and services. It is being put in place to ensure asset managers do what they say they are doing and have robust evidence to back up their sustainability claims. Whilst fair, clear and not misleading disclosure is not a new concept,  what is new is the explicit regulatory focus on greenwashing.  Globally, international regulators are taking action, with the U.S. Securities and Exchange Commission and the Australian Securities & Investments Commission imposing fines and a number of other cases currently being investigated.

Identifying, assessing and managing greenwashing risk is complex and has far reaching impacts across the asset management operating model.  We are seeing firms express numerous concerns on present vulnerabilities, which is increasing their exposure to regulatory and reputational risk:

Concern #1: Nobody is accountable for sustainability risk within my organisation despite the increased regulatory focus and number of fines

In a recent poll we conducted with asset managers, a fifth of respondents continue to face this concern.  Lack of ownership for sustainability risk remains a challenge, and most firms have yet to fully define roles and responsibilities with respect to sustainability risk. Firms are also still only beginning to identify how sustainability risks impact their activities. Some claim transversal integration; however, this makes socialisation and ownership particularly onerous to achieve.

Concern #2: I am unclear on which committees are responsible for overseeing sustainability risk and how concerns are escalated

The FCA expects Boards and other governance bodies to be appropriately structured to oversee and review management information relating to their ESG activities, third-party ESG information providers used and claims made by their firms, however, 40% of respondents in our poll felt they were still unclear on the governance of sustainability risk. Where governance structures have not been fully defined and/or suitable internal reporting on greenwashing risk remains undefined, firms remain exposed to potential instances of greenwashing that may not be detected in a timely manner.

Concern #3: It has been a challenge to get regulatory change projects over the line, which has exposed us to delivery risk

Almost two-thirds (63%) of asset managers are experiencing this challenge. Several managers struggled to get the Sustainable Finance Disclosure Regulation over the line and the UK’s Sustainable Disclosure Regulation is now driving further timelines, with many firms seeking to apply sustainability labels to their products by 31 July. Sustainability-related change programmes are overstretching in-house sustainability experts and increasing the risk of inaccurate disclosure, sub-optimal integration into BAU operational processes and resource overload.

Concern #4: We have identified some areas of sustainability risk but control enhancements have not yet been implemented

Almost three-quarters of firms either agree (60%) or are not sure (14%) whether control enhancements have been implemented to address sustainability risks. Time is running out on the anti-greenwashing rule, and whilst we have seen several managers conduct a review on one aspect of their operating model, few have considered sustainability risks and controls across their end-to-end operating model.

Concern #5: We do not have a plan to respond to sustainability risk regulatory queries or allegations

A third of respondents accepted they do not yet have a plan or were uncertain as to what their plan would be to handle sustainability risk regulatory queries or allegations.  A lack of clarity on who will deal with regulatory queries pertaining to sustainability risk may result in being on the backfoot to respond to regulatory queries and provide relevant information. This may also slow down action required to respond to potential allegations from regulators or wider stakeholders.

If you would like to discuss your firm’s efforts to prepare for the anti-greenwashing rule and/or sustainability risk management more generally, please contact us.