As the UK (and many countries in Europe) experiences record high temperatures, the importance of meeting climate change targets is ever more significant.  Companies are keen to assert their eco-friendly credentials. According to the UK's statutory regulator of the financial sector, the Financial Conduct Authority (FCA), more than $1 trillion was raised globally by the issue of “green” bonds in 2021. Against that background, the FCA published its Environmental, Social and Governance (ESG) Strategy in November 2021, in which it stressed that market participants and consumers must be able to trust green and other ESG‑labelled financial instruments and products.

In June 2021, the FCA consulted about ESG integration in UK capital markets, seeking views about  issues related to green, social, sustainability and sustainability‑linked debt instruments (ESG‑labelled debt instruments), including:

  • Prospectus and ‘use of proceeds’ (UoP) bond frameworks;
  • The role of verifiers and second party opinion (SPO) providers; and
  • ESG data and rating providers.

The FCA says that these are active areas of industry debate. It asked for feedback on potential harms that may require further policy intervention, as well as input on other actions the FCA could take to enhance primary market effectiveness and to support more broadly its strategic objective to make relevant markets function well.

The FCA has now published its Feedback Statement.  It sees a clear rationale for regulatory oversight of certain ESG data and rating providers – and for a globally consistent regulatory approach informed by the recommendations on ESG data and ratings developed by the International Organization of Securities Commission in 2021.

It therefore supports the UK government’s consideration of bringing ESG data and rating providers within the FCA’s regulatory perimeter. In the meantime, the FCA:

  • encourages issuers of ESG‑labelled UoP debt instruments to consider voluntarily applying or adopting relevant industry standards, such as the Principles and Guidelines that the International Capital Market Association (ICMA) has developed for green, social, and sustainability bonds; and
  • the FCA also encourages issuers and their advisers to consider verifiers’ and assurance providers’ expertise and professional standards, and to engage with SPO providers and verifiers who adhere to appropriate standards of professional conduct, such as ICMA’s Guidelines for External Reviewers.

In relation to advertising, the FCA remind issuers, their advisers and other relevant market participants of their existing obligation to ensure any advertisement issued in relation to an offer to the public or admission to trading on a regulated market is not inaccurate or misleading, and is consistent with the information contained in the prospectus. Where advertisements do not meet the FCA’s expectations, the FCA will consider the case for market oversight or enforcement actions.

We have written about various aspects of greenwashing from the advertising and consumer protection perspectives, and it is significant that the FCA is now reviewing the way debt instruments are marketed to other businesses and lenders and is taking seriously the role the financial services sector can play in combating climate change.

Organisations need to ensure that they comply with FCA and other requirements regarding "green claims".  Such claims need to be carefully reviewed to ensure that they are not exaggerated.  The risk of enforcement and/or litigation is increasing, as well as the adverse publicity arising from complaints.  

Photo by Mika Baumeister on Unsplash