Articles - Greenwashing and next steps for the insurance industry


As the demand for products with positive sustainability outcomes grows, both the insurance industry and regulators are giving more attention to the risks of greenwashing. A consumer survey we commissioned last year looking at attitudes to sustainable investment found that for 60% of participants, climate change was a factor in their assessment of potential investments.

 By Rebecca Macdonald, Head of Products and Sarah Clare, Senior Consultant at Hymans Robertson

 This echoed a trend identified in the Financial Conduct Authority (FCA) 2022 Financial Lives Survey, which found that 74% of adults agreed that environmental issues were important to them. It’s therefore not surprising that ensuring consistency and clarity of information around sustainable investments is high on the FCA’s agenda.

 The FCA’s policy statement PS23/16 on Sustainability Disclosure Requirements (SDR) looks to tackle this risk through inclusion of an explicit anti-greenwashing rule, due to come into effect from 31 May 2024. This rule aims to help ensure that sustainability claims are “fair, clear and not misleading”, language that mirrors existing requirements under the Consumer Duty principle.

 However, the anti-greenwashing rule goes further by requiring that claims are consistent with the sustainability profile of the product or service. In this context, the FCA considers both environmental and social characteristics to fall within the definition of sustainability.

 The SDR policy statement was accompanied by a consultation with additional guidance on the anti-greenwashing rule, setting out five key standards for sustainability claims.

 It outlines that these claims should be:
 Correct
 Capable of being substantiated
 Clear and presented in a way that can be understood
 Complete, i.e. they shouldn’t omit or hide important information and should consider the full life cycle of the product of service
 Comparisons to other products and services must be fair and meaningful.

 The FCA issued final guidance on the anti-greenwashing rule on 23 April 2024. 69 responses were received in response to the initial consultation, with the FCA noting that most were broadly supportive of the guidance and the overall anti-greenwashing initiative. The key areas of feedback related to requests for examples covering additional sectors, specific examples of good practice and for examples to include both social and environmental scenarios. All of these have been addressed within the final guidance.

 The final guidance is broadly similar to that issued for consultation, setting out the FCA's expectations and illustrative examples for each of the five standards noted above. Interestingly, neither the consultation nor the final guidance includes any further details on expectations around sustainability claims being consistent with the sustainability profile of the product or service, the “new” part of the SDR requirements. The potential evidence requirements for demonstrating that sustainability claims are consistent with the sustainability profile of the product or service are significant, and there may be additional complexity for firms who use proxy data or assumptions. The final guidance also clarifies that the anti-greenwashing rule will impact all live financial promotions from 31 May 2024, but won’t be applied retrospectively.

 The anti-greenwashing rule applies to all communications relating to products and services, including statements, strategies, targets and images. However, the risk of greenwashing is not contained within one business function or activity, creating the potential for it to be difficult to assess and manage.

 To illustrate the variety of sources of greenwashing, some examples where a firm could fall foul of the requirements include:
 failures in internal processes causing errors in the calculation of metrics
 vague or unclear wording used within in their policy information
 lack of integration of sustainability risk leading to actions taken that do not match the firm’s sustainability strategy.

 While there will be a cost to firms in meeting the FCA’s expectations on anti-greenwashing, the ultimate goal of increasing transparency should help customer engagement and ensure insurance firms consistently apply more rigour when making sustainability claims.

 Regulatory outlook
 Anti-greenwashing is on the agenda of many regulators, creating the potential that firms may need to comply with several differing regulatory regimes. In the UK market, the Green Claims Code, developed by the Competition and Markets Authority (CMA), aims to protect customers from misleading environmental claims. The Advertising Standards Authority (ASA) can also take action for misleading green claims which appear in advertising material. The FCA has noted they have worked closely with the CMA and ASA to ensure consistency. Further afield, the European Insurance and Occupational Pensions Authority recently released a consultation paper on greenwashing, with the aim of creating a more effective and harmonised supervision of sustainability claims across European firms.

 Climate litigation
 Looking across the globe, there is growing concern over potential greenwashing litigation. However, in avoiding greenwashing, firms need to make sure they are not perceived as not “doing enough” to combat the climate crisis. A report from the London School of Economics found that nearly 90% of climate litigation cases filed outside of the US since June 2022 have been brought by non-profit organisations, individuals or both. The report also identifies an increasing trend of strategic litigation against corporations, where cases are brought with the aim of influencing the broader debate around climate change rather than necessarily seeking to win cases. This is particularly relevant to property and casualty firms insuring carbon-heavy industries.

 What steps should insurers be taking now?

 There are a number of actions firms should be taking now in preparation for the end of May deadline, including:
 conducting a thorough review of customer materials to identify any sustainability claims
 gathering evidence to support these claims, ensuring sustainability benefits are objectively measurable
 considering obtaining an external review of your customer materials
 incorporating greenwashing risk within your risk management framework.

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