The anti-greenwashing rule: Impacts on the insurance industry

What is greenwashing?

Greenwashing can appear in various forms and the UK Financial Conduct Authority (FCA) refers to it as: “marketing that portrays an organisation’s products, activities or policies as producing positive environmental outcomes when this is not the case”.

Applicability of the rule

The recently published Sustainability Disclosure Requirements (SDR) introduced a consultation on a guidance which helps the industry comply with the anti-greenwashing rule. The guidance consultation is open until 26 January 2024, with the AGR coming into effect on 31 May 2024.

 To comply, firms must ensure that their sustainability claims are:

• Fair, clear, and not misleading.
• Consistent with the sustainability characteristics of the product or service offered.

Introducing the AGR aims to reduce the ambiguity that some firms may make in their sustainability-related claims and ensure that consumers and businesses have matched expectations. All FCA-regulated (re)insurers need to show to consumers, regulators, and wider stakeholders that they are not greenwashing.

How it impacts the insurance industry

Greenwashing has already occurred across the (re)insurance value chain and anything released by (re)insurers that references sustainability must be able to withstand scrutiny under the AGR.

We outline some examples of how the (re)insurance value chain could be impacted, and this highlights the need to prepare for the AGR.

Products – an insurer offers the “greenest” insurance product without clarity on how the conclusion is reached or benchmarked against other products in the market.

Underwriting – advertising commitment to sustainability whilst continuing to underwrite risk for fossil fuel infrastructure.

Net Zero commitments – making misleading public commitments about transitioning activities to net zero by 2050 but without any credible plans to do so.

Governance – when employee remuneration is linked to climate targets, the targets introduced will be easy to achieve and not have a meaningful impact on reducing emissions.

Culture – a culture of profit can be an incentive to make misleading sustainability claims to gain a competitive edge and attract more consumers.

Ratings – being qualified as ‘sustainability leaders’ by third-party rating providers where the rating is calculated relative to the industry. This rating methodology can give a false impression that the company is benefitting the environment when the (re)insurer is only slightly better than a bad industry average.

Investment strategy – as asset owners, (re)insurers could disclose their green investments without full details of why green labels have been assigned.

Sales and marketing – posting an advertisement showing images of the rainforest misleading customers that their policies help fund the effort to stop deforestation, when in fact they are not helping in this matter.

Reporting and processes – disclosing sustainability details which cannot be substantiated. For example, greenhouse gas (GHG) emissions disclosures which are based on inaccurate data.

As shown above, increasing sustainability requirements have given (re)insurers plenty of opportunities to demonstrate their sustainability but it inadvertently creates opportunities and incentives for greenwashing.

The core principles within the AGR already exist for FCA-regulated firms’ regulatory obligations such as the FCA’s principles for businesses and Consumer Duty. However, the AGR streamlines the guidance and presents an obligation for all FCA-regulated (re)insurers to be clear about their sustainability-related claims.

Any (re)insurer that makes misleading sustainability claims may suffer significant reputational and financial damage when stakeholders are informed of a greenwashing occurrence. There is a likelihood of regulatory fines and an increased liability risk.

Steps to consider for addressing the greenwashing risk

We recommend amending the existing risk framework to incorporate identifying greenwashing and mitigating the risks connected. This allows for appropriate senior-level oversight thereby enhancing corporate governance.

The FCA has not given a specific risk framework but instead encourages the development of an industry-led greenwashing framework which (re)insurers must then tailor to cover their bespoke risks.

Set out below are key areas that can be considered when looking to build an anti-greenwashing framework:

• Firm-wide collaboration for a greenwashing definition.

It is important to be consistent in the definition so that there is a common understanding of greenwashing across the business and to ensure the definition meets the regulatory expectations.

• Undertake a greenwashing risk assessment.

Consider reviewing any sustainability-related commitments, marketing material, products, and services to be scrutinised against the firm-wide adopted greenwashing definition.

• Proactively manage greenwashing risk.

Ensure there are adequate internal processes and training to manage the greenwashing risk that has been identified.

• Embed sustainability criteria into existing risk and governance frameworks.

Review existing frameworks and embed sustainability criteria to formulate a greenwashing risk management framework.

• Aligning sustainability-related reporting and disclosures.

Review existing reporting processes and controls to ensure the AGR criteria are met which enables disclosure of verifiable information.

What’s next?

With greenwashing being listed as foreseeable harm by SDR, it has now become a principal pillar of Consumer Duty. (Re)insurers may respond to the consultation by 26 January and consider:

• Reviewing their existing risk management framework as described above.
• How the AGR applies to them under the context of the existing FCA business principles and Consumer Duty.
• Ensuring that senior management has the suitable skills to prepare an anti-greenwashing risk framework and whether external support is needed.