Will Crypto Businesses be Affected By the New Anti-greenwashing Rule by the FCA?

The Financial Conduct Authority (FCA) has recently made a step in an attempt to boost the integrity of sustainability claims. This has established a new anti-greenwashing rule within the financial sector.

Why Introduce a GreenWashing Rule?

The motivation behind a move like this is the rising consumer (and investor) demand for sustainable products and services—something that has particularly been strong across the United Kingdom. Consumers want to buy from companies that show environmental and social responsibility, and retail investors are no different in who they wish to back. This means that making claims of sustainability (and not just empty claims) is increasingly important.

The anti-greenwashing rule, which is part of a broader package of measures confirmed by the FCA, aims to instil greater trust and clarity in the market for sustainable investment products. At its core, the rule requires that any claim relating to sustainability which is made by an FCA-authorised firm must be “fair, clear, and not misleading”. This rule is a crucial development in a market where, according to PWC, there's a substantial £18.4 trillion in ESG-oriented assets being managed globally.

The rule's implementation comes after a growing concern over the authenticity of environmental, social, and governance (ESG) claims. There's an increasing awareness among investors and regulators alike that ESG is being gamed. 

Misleading and exaggerated claims can make an operation appear more virtuous than it really is, and it can score points with investors. This is known as 'greenwashing'.  If we look at the prevalence of ESG funds on investing platforms like Vanguard, it’s clear that being included in the list is a positive for investment. 

By introducing this rule, the FCA is essentially setting a higher standard for transparency in sustainability claims, ensuring that firms back their claims with credible evidence.

Ultimately, the rule is driven by the FCA attempting to align the financial sector with broader ESG expectations—what people actually want and not just telling them what they want to hear. The FCA is in a constant battle to ensure the claims that financial firms make, but this time, the claims they’re regulating go beyond finance.

The Scope and Details of the Anti-greenwashing Rule 

When looking into the FCA's anti-greenwashing rule, particularly as a crypto firm, it's important to understand its scope. This is because ESG, to many, is a vague notion. This rule encompasses a broad spectrum of financial products and services, and crypto may be included.

The rule claims that any sustainability-related terms like "green", "environmental", or "responsible" used in a product’s name must meet certain criteria. These include either carrying one of the four prescribed labels or adhering to specified naming and marketing criteria if the product does not use a label. This requirement goes beyond just the naming though; it refers to the entire marketing narrative of a product. 

The rule emphasises that product names must accurately represent their sustainability characteristics, and firms are obligated to provide a statement if their products lack a label, explaining why.

Another critical aspect of the rule is the requirement for clear and substantiated claims. Firms must ensure that all sustainability claims are factual, meaning they’re supported by credible evidence. This implies a rigorous, ongoing process of reviewing and verifying claims against the evidence collected (not a one-time compliance check), ensuring that they remain accurate over time. After all, a product's sustainability characteristics might evolve, necessitating regular compliance checks by firms.

The rule also asks for a holistic representation of products or services, requiring claims to be complete and consider the full life cycle. So, any caveats to claims must be clearly and prominently stated. Firms must balance positive characteristics against negative impacts, ensuring a comprehensively balanced portrayal of their products.

Although it's early days, the new rules appear to be setting a high bar for transparency that goes beyond just finances.

Impact on Crypto Businesses and the Financial Industry

Crypto was not explicitly stated in the FCA's anti-greenwashing rule statement, meaning it has caused confusion in the industry. However, it’s evident that this regulation, while not directly targeting crypto businesses, has implications for those operating within this space. 

The rule's emphasis on substantiated and transparent sustainability claims is particularly pertinent to crypto firms, especially those that are FCA-authorised or have their activities approved under Section 21. Ultimately, the greenwashing rule applies to all FCA-regulated firms. And, given that the FCA is involving crypto more and more in FCA regulations, such all-encompassing FCA rules are increasingly applied to crypto firms.

Any claims by crypto firms regarding their products' environmental or social impact fall within the purview of this rule. This is of particular relevance given the growing scrutiny over the energy consumption and environmental impact of certain cryptocurrencies, mostly due to the energy required when mining.

For crypto firms that are either directly authorised by the FCA or have their marketing approved by an FCA-authorised firm, adherence to the anti-greenwashing rule is a necessity. These firms must ensure that any sustainability-related claims are not only clear and accurate but also substantiated by credible evidence. This extends to claims made in marketing materials, product descriptions, and public communications.

The implications on crypto firms aren’t just the rule itself, but a clear change in taking ESG more seriously from regulators. This is bad news for many cryptocurrency firms, many of which likely do not take ESG seriously, or face energy use challenges for its operations.

This regulatory landscape places an onus on crypto businesses to re-evaluate their sustainability narratives, ensuring they align with the rule's stringent standards.

Sustainability Disclosure Requirements (SDR) and Labelling Regime

In addition to the anti-greenwashing rule, the FCA has introduced the Sustainability Disclosure Requirements (SDR) and a labelling regime, which has a particular focus on sustainable investment. This makes it important to provide clear, comprehensible information to investors about the sustainability credentials of financial products—potentially including those in the crypto space, but only if these crypto firms position themselves as a sustainable investment.

The SDR encompasses a dual approach: product-level and entity-level disclosures. Product-level disclosures require consumer-facing information, pre-contractual details, periodic updates, and on-demand disclosures. These elements collectively ensure that investors receive comprehensive and timely information about the sustainability aspects of their investments.

At the entity level, the SDR aligns with the principles outlined by the Task Force on Climate-related Financial Disclosures (TCFD). It requires firms to disclose information about their governance, strategy, risk management, and metrics—it targets sustainability-related risks and opportunities. 

The labelling regime under the SDR is another element to consider. It requires clear, consumer-friendly labels on financial products, based on well-defined sustainability criteria. This aspect of the SDR ensures that products marketed as sustainable meet high standards, thereby reducing the risk of greenwashing. Again, crypto isn’t explicitly mentioned, but it would likely be included in a FCA-regulated crypto project that makes sustainability claims.

Overall, the combination of the anti-greenwashing rule, SDR, and labelling regime represents a comprehensive framework aimed at bolstering the credibility of the sustainable investment market. Given that ESG investment is under increasing scrutiny at the same time as crypto’s carbon footprint, it’s clear that crypto firms must take greenwashing compliance into account.

Compliance Challenges and Opportunities for Crypto Firms 

Navigating the compliance landscape under the FCA's anti-greenwashing rule, along with the Sustainability Disclosure Requirements (SDR) and labelling regime, presents a unique set of challenges for cryptocurrency firms in the UK—not least because they are not explicitly referred to in the FCA statement or the 100+ page SDR consultation paper. 

Nevertheless, it would be misguided confidence to assume that crypto isn’t at all in the firing line of the FCA’s crackdown. Adherence to these regulations demands a considerable shift in how crypto businesses approach sustainability claims and disclosures, something that some crypto firms currently do in an attempt to revolt against the dominant narrative of cryptocurrency being unsustainable.

Ten years ago, cryptocurrency was seen as a purely decentralised, unregulated way to exchange money (or ‘assets’). Today, major regulators are approving Bitcoin for ETF inclusion, the FCA is regulating crypto promotions and sustainability claims… It’s clear that compliance is something that crypto projects need to fully accept and take seriously.

The new challenge for crypto firms lies in the rigorous substantiation of their sustainability claims. Given the energy-intensive nature of some cryptocurrencies, providing credible and detailed evidence to support any environmental claims becomes a complex task. This involves not only understanding and measuring their products' environmental impact but also communicating this information accurately to investors and regulators. The necessity for robust internal processes to review and verify sustainability-related claims adds another layer of complexity, particularly for smaller firms with limited resources.

However, these challenges aren’t without their rewards. Compliance with these stringent regulations can enhance a firm's credibility and trustworthiness in the eyes of investors and the broader public. If it makes claims about sustainability, they will now be believed. 

It also presents an opportunity for differentiation. In a time when ESG funds are growing in popularity, and may soon become the default way to invest, being an early pioneer of green crypto is a competitive advantage. It could attract a broader investor base, build confidence in the community, and create another USP.

Aligning with the FCA's standards enables crypto firms to join in with the broader movement towards sustainable finance. By setting high standards for sustainability disclosures, these businesses can play a pivotal role in shaping the perception of the cryptocurrency market—potentially being a thought leader, too. This doesn’t just make a project more competitive, but it can boost the reputation of crypto as a wholesale.

Global Context and Future Regulatory Landscape

The UK's regulatory framework does not exist in isolation. It is part of a wider, international movement towards more sustainable and transparent financial practices. 

From the WEF and UN climate meet-ups to the Paris Agreement, fighting climate change has become a global movement. Co-operation, after all, is required to make uniform goals and work towards them.

The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is a notable example of international regulation, setting similar standards for financial market participants in the EU. The FCA’s regulations, while distinct, share a common objective with the SFDR: to prevent greenwashing in the financial sector. This international trend reflects a growing consensus among regulators that sustainability claims must be substantiated. This is the primary way of protecting investors and guiding capital towards genuinely sustainable investments.

Crypto is inherently international as blockchains do not recognise national borders. For the crypto industry, most firms want to target their project to an international market. Of course, there are regulatory frictions on this as you often need to be compliant in the country you’re operating in, and the sustainability claims will be no different (though some regulators may be falling behind on others). Ultimately, taking the right measures at home could lead to the benefit of international compliance.

UK-based crypto firms will not just have the FCA’s anti-greenwashing rule to navigate, as there are others (if not today, they will come). A global approach to compliance makes sense, particularly with the FCA being one of the hardest hoops to jump through.

Crypto has often been elusive for regulators, but they’re tightening their grip. Looking forward, it’s clear that crypto firms must increasingly see themselves as any other FCA-authorised firm does, and act accordingly.

Summary

In summary, the introduction of the FCA’s anti-greenwashing rule, coupled with the Sustainability Disclosure Requirements (SDR) and the labelling regime, highlights a ramping up of ESG regulation in the UK. While these regulations are primarily aimed at traditional financial products, they have implications for crypto businesses, particularly those under the purview of the FCA.

The spirit of the new rule is simple: if you make sustainability claims, you must now back them up. However, being highly unsustainable could hurt you in the long run, not just from the eyes of stakeholders, but inevitable future regulation that further enforces green practices.

For crypto, it’s a double-edged sword. It poses further compliance challenges that many crypto-enthusiasts may disagree with ideologically, but it remains a fact. The crypto projects that are more likely to prosper will be the ones that lean into regulations and prove themselves to be responsible and conscience-minded entities. Contact the team at Englebert today to see how we can help your business.

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