FCA Plans to Relax Forward-looking Statement Rules Risks Greenwashing
The UK regulator plans to introduce a protected status for some forward-looking statements.
Proposals by the UK’s Financial Conduct Authority (FCA) aimed at encouraging listed companies to make more informative forward-looking statements in their prospectuses could lead to a “proliferation in negligent greenwashing”, litigation finance provider Woodsford has warned.
Currently, under FCA rules the burden is on an issuer to show that forward-looking statements did not negligently include untrue or misleading information. But under a reformed regime, the FCA has proposed that it will have the power to designate certain types of ‘protected forward-looking statements’ (PFLSs).
With a PFLS, a person responsible for a prospectus would be liable for an untrue or misleading PFLS only if they knew, or were reckless as to whether it was untrue or misleading. Further, the burden of proving inaccuracy would be shifted to the investor.
This is designed to make it easier for issuers to include PFLSs in prospectuses, however, David Haughan, Investment Officer at Woodsford, argued “it is highly likely that this change would lead to the publication of less accurate information”.
According to Haughan, the proposal in the FCA’s engagement paper aims to raise the liability standard for certain types of forward-looking statements to make it more difficult for shareholders to hold issuers to account when such statements are untrue or misleading.
The move comes as the volume of forward-looking statements from companies looks set to increase from UK-based firms, with government plans to mandate climate transition plans. It is not clear yet whether the FCA could place transition plans under its PFLS category, explained Haughan
“Care and strictness”
In a submission to the FCA, Woodsford told the regulator that it should ensure that, to the extent that the categories of PFLS will include sustainability and other ESG-related forward-looking statements, these are defined with particular “care and strictness”.
“There is otherwise a risk that the FCA’s proposed policy changes could lead to a proliferation in negligent greenwashing by issuers, undermining the attempts of responsible investors to support issuers that espouse ESG principles”, Woodsford said in its submission.
Data science firm RepRisk has released research showing an increase in greenwashing among public companies. It found that one in every four ESG risk incidents globally linked to climate were tied to greenwashing, an increase from one in five in last year’s report.
Further, 31% of publicly listed companies linked to greenwashing from September 2018 to September 2023 were also linked to social washing, the report noted.
RepRisk also found that the financial services sector saw a 70% increase in the number of climate-related greenwashing incidents in the past 12 months.
“The expectation of competitive advantage derived from an image of sustainability has opened the door to green and social washing,” said Dr Philipp Aeby, CEO and Co-Founder of RepRisk. “A lack of accountability around a rapidly evolving landscape of corporate sustainability has helped keep this door open for a long time.”
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