How will new FCA greenwashing rule tackle banks’ dodgy climate claims?

Banks pride themselves on knowing their customers. So, when the public began to show concern about the climate crisis, they responded with a deluge of sustainable products, climate targets and green promises. But not all of those promises have stood up to scrutiny.

The result has been a global crackdown on “greenwashing” – false or misleading claims made by a company about its climate credentials. In the US, Goldman Sachs was fined for failing to follow its policies and procedures on ethical investments. Australia’s regulator has taken three investment funds to court for erroneous claims about “net zero” or “carbon neutral” investments. And in Germany, Deutsche Bank’s offices have been raided by police in relation to greenwashing claims.

In the UK, though, the pushback against greenwashing has been less effective. Not because of an absence of allegations: Barclays was branded “totally dishonest” by one of its investors after the Bureau of Investigative Journalism (TBIJ) revealed it helped raise tens of billions of dollars for fossil fuel companies last year and called it “sustainable finance”. HSBC has been subject to similar revelations and has also come under fire for misleading adverts highlighting its green initiatives.

The problem is that the UK’s financial regulator, the Financial Conduct Authority (FCA), has been far more reluctant to take action. There were no greenwashing cases underway against any financial institutions in 2022. And it has refused to respond to freedom of information requests asking how many cases – if any – it is currently bringing.

But a new anti-greenwashing rule being introduced by the FCA today could change things. The rule states that all sustainability‐related claims about products and services must be fair, clear and not misleading. Breaching the rule could mean facing a reprimand or a fine. It’s designed to help customers understand what their money is being used for, and to ensure that businesses’ environmental claims are properly backed-up.

As an example, the FCA suggested a webpage with the title ‘Sustainable Savings’ and a large photo of a rainforest, which listed one green savings account alongside others without any green commitments, could be misleading.

Rachel Richardson, head of environment, social and governance at the law firm Macfarlanes, said: “This probably indicates that they have seen examples just like this and it is effectively a warning to firms. ‘We are now going to do something about this – get your house in order.’”

The campaign group Make My Money Matter has written to the FCA asking it to consider a greenwashing investigation of the UK’s largest high street banks, given their 1.5 degree and climate statements, and continued financing of fossil fuel expanders.

There is a question mark over whether the FCA has the resources to successfully challenge the sustainability claims made by deep-pocketed and well-staffed businesses. But it has backup. Most of these institutions are global businesses, meaning they have to contend with regulators around the world. With growing scrutiny in multiple jurisdictions, it may become cheaper and easier to simply comply with the rules.

Banks have also realised this is an issue that customers care deeply about. Being caught greenwashing is likely to have a greater cost than any fine the regulator might levy. HSBC, for one, has made sustainability a core part of its brand. If the bank was found to be lying about its sustainability credentials, its reputation would be in tatters.

The FCA has been praised for the clarity of its anti-greenwashing guidance but much still depends on its enforcement. Several TBIJ investigations have highlighted examples of banks raising supposedly “sustainable” finance for companies fuelling the climate crisis.

Take Barclays, which helped raise a multibillion-dollar “sustainability-linked” loan for Harbour Energy – the UK’s largest oil and gas producer, which has no apparent plans to shift to renewables. The loan is called sustainable because Harbour has committed to reducing emissions from the process of extracting fossil fuels. But this takes no account of the vast majority of Harbour’s emissions, which are generated from burning the fuels. It remains to be seen whether the FCA would consider the claim that this is “sustainable” finance to be misleading, and take appropriate action against Barclays.

​​The new rule applies to the marketing for financial products and services but the FCA adds that high-level claims made by banks will also be scrutinised. This could be a big step forward in addressing greenwashing. Both HSBC and Barclays claim to be aligning their business with limiting global heating to 1.5 degrees. Yet both banks continue to fund companies expanding oil and gas production, which scientists say will derail that target.

Gavin Haran, head of policy and asset management also at Macfarlanes, said banks could be criticised and punished for trumpeting their net-zero ambitions without explaining how they’ll tackle the polluting parts of their business as part of their transition plans.

There is some concern that the new rule will cause banks and investment funds to keep quiet about their environmental pledges – a practice known as “greenhushing”. But this seems unlikely while demand for sustainable products and services remains strong. Banks that can back up their claims will want to keep winning climate-conscious customers. If this rule forces others to scale back or follow through with their claims, that can only be a good thing.