The UK's incoming anti-greenwashing rule under its Sustainable Disclosure Requirements regulation is posing problems for banks that underwrite ESG-labelled debt products, as the financial services sector grapples with the broader overhaul of sustainability claims.
The anti-greenwashing rule and guidance is causing confusion ahead of its implementation on May 31 for entities regulated by the UK's Financial Conduct Authority, including underwriting banks, which are struggling to assess which of their businesses and products are affected by the regulation.
"Banks are looking at their corporate finance businesses to see if they have to start complying with the anti-greenwashing rules as they are offering more sustainable finance products and ESG capital markets products and are having a trickier job working out what is in and out of scope from these rules," said Sebastian Barling, a financial regulation partner at law firm Linklaters.
The FCA released its Sustainability Disclosure Requirements and investment labelling regime in November. They were combined with a broader anti-greenwashing rule as well as naming and marketing rules for investment products in an effort to ensure sustainability-related claims are fair, clear and not misleading.
But as it is currently drafted, there is a risk that the anti-greenwashing rule may apply to banks that are communicating financial promotions as part of their underwriting or bookrunning roles when they share a prospectus or investor presentation or issuers' in-house sustainability claims.
That is because the anti-greenwashing rule is not subject to the same exclusions that currently apply and could therefore result in a significant increase in obligations for underwriters and bookrunners.
"There is a concern among bond underwriters that it would lead to a sharing of responsibility that could potentially require additional due diligence considerations," said Ruari Ewing, a senior director at the International Capital Market Association.
The anti-greenwashing rule covers a huge range of communications that banks and other financial institutions make, including marketing, fund documentation, prospectuses and key investor information documents.
It also applies to the use of images, which raises questions around ubiquitous pictures of seedlings, trees and other nature pictures in marketing material.
"If you are publishing a website or a prospectus for a product that is covered in pictures of verdant jungle and smiling orangutans but actually it’s a Canadian coal tar oil investment, the FCA has indicated that will be seen as greenwashing and you can’t do it," Barling said.
The trade bodies for the bond and loan market responded to the FCA guidance consultation in January. The FCA published its guidance in February and said it would be updated to provide clarification on common queries but gave no timeframe.
"It remains to be seen whether the regulator's incoming anti-greenwashing rule guidance will expressly allay market concerns or leave it to firms to determine for themselves," said Terry Yiangou, a managing associate at Linklaters.