With an increased awareness of and drive towards environmental sustainability, it was inevitable that customer demand would lead to the highly regulated financial services sector both taking steps to present itself as environmentally conscious and to market products for customers seeking sustainable, green investments. It was likewise inevitable that not all such claims would prove accurate, leading to complaints that regulated firms have become involved in "greenwashing", essentially misleading customers into entering relationships or investments based on false or exaggerated information about the reduced environmental impact.

This issue has proven a tricky one for the Financial Conduct Authority (FCA). For example, although the FCA has the power to take action against false or misleading information under both its own COBS rules and criminal legislation, it has not yet done so in relation to products with ESG claims. The absence of enforcement action so far from the FCA is in contrast to other regulators such as the Advertising Standards Agency which has been noticeably active, including in the financial services sector, most recently upholding a complaint against HSBC for misleading advertising, where adverts focused on its environmental ambitions, without also containing information about its contribution to emissions.

The absence of enforcement action in this area by the FCA may be due to the difficulties in establishing direct customer detriment, which although is not of course a necessary feature for regulatory action, is an indicator of serious harm which is not necessarily present where a greenwashing claim is made. But more likely due to uncertainty in establishing the baseline for what is "misleading information" with these types of products. However, new regulatory rules, including upcoming rules from the FCA, provide far clearer reference points and will no doubt lead to an uptick in enforcement action and litigation based on misleading ESG claims.

From January next year, for example, we expect to see the first annual financial reports which will be required to include climate-related disclosures as mandated by the Listing Rules (9.8.6 (8)R). Although our expectations are that the Financial Reporting Council (FRC) will take the lead on ensuring compliance with the Listing Rules and asking for further and better disclosures on a case-by-case basis, in instances where the quality of the information is identified as being potentially false or misleading, we would expect that this would be referred to the FCA in contemplation of enforcement action.

In July 2021, the Regulator also sent a "Dear CEO" letter to investment funds which market themselves specifically with a sustainability and ESG focus, identifying issues generally across the market with the quality and accuracy of the ESG investment strategies of such firms and of the information that is provided to consumers at the outset and on an ongoing basis. Dear CEO letters are often the first indication of future enforcement trends.

Most recently, at the end of October 2022, the FCA launched its consultation on product labelling for "green" investments. The new rules should improve customer confidence and understanding when choosing sustainable investments and also set baseline expectations for when a product can be said to be "green" or "sustainable". Once there is a clear baseline, it is much easier to see when expectations are not met, so providing a clearer path to enforcement action. In summary, the FCA has proposed:

• sustainable investment product labels – firms will be required to meet objective criteria in order to use one of three ESG "product labels" targeted at the sustainability objective the investment is aiming to achieve;
• a general anti-greenwashing rule applicable to all regulated firms to reinforce existing requirements that information is clear, fair and not misleading;
• further disclosure requirements for "sustainable" features of investment products for both retail and sophisticated investors, including additional disclosure expectations on the distributors of such products.

In short, there is a substantial package of measures, and it appears that the FCA is not only communicating its hope that its regulated firms will act with expected integrity in the ESG business area, but also putting in place a framework of rules and expectations which it will follow through with enforcement action. It is therefore vital that financial services firms ensure that in both how they present as a business in this space, and in the design and promotion of ESG products, that their communications are clear, fair and based on verified and accurate information in compliance with the new regime as and when it comes into force over the next 12-18 months. A failure to do so appears increasingly risky in terms of litigation, reputational and regulatory risk.