The UK’s Financial Conduct Authority (FCA) has set out its expectations about the design, delivery and disclosure of environmental, social and governance (ESG) and sustainable investment funds, saying many fund applications were of poor quality.
The FCA regulates asset managers and contract-based pension providers, among other entities, and has been engaged in work to tackle greenwashing for over a year. It had draft principles for fund management firms ready by last autumn.
Today it set out final guiding principles in a letter to the chairs of authorised fund managers. It said it was “essential that funds marketed with a sustainability and ESG focus describe their investment strategies clearly and any assertions made about their goals are reasonable and substantiated”.
A number of applications for authorisations of such funds had been poorly drafted and they often contained “claims that do not bear scrutiny”, the regulator warned.
It said it would have expected questions raised at the authorisation stage to have been asked and addressed in the product design phase.
“We expect to see material improvements in future applications,” wrote Nick Miller, head of department for asset management supervision at the FCA.
“We also expect clear and accurate ongoing disclosures to consumers where funds make ESG-related claims, and we want to see funds deliver on their stated objectives and/or strategy,” he added.
“A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure”
The guiding principles are targeted at funds that make specific ESG-related claims, not those that integrate ESG considerations into mainstream investment processes.
Indeed, the FCA said that for the latter type of fund, where there was no material ESG orientation in the fund design or strategy, the regulator would “not expect to see prominent ESG claims in the fund’s name or documentation, or ESG positioned as a key part of that fund’s offering”.
The FCA’s overarching principle is consistency.
“A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure,” the FCA told chairs of authorised fund managers. “A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy, and its holdings.”
The regulator’s expectations with regard to the design, delivery and disclosure of funds are set out in three supporting principles, with each principle accompanied by a set of key considerations to add clarity.
Complementary to SFDR
The regulator said the guiding principles were intended to be “complementary” to obligations under the EU’s sustainable finance disclosure regulation (SFDR).
It also said they had been developed with the aim of being compatible with prospective future disclosure rules for responsible and sustainable investment products, including recently announced government plans for economy-wide Sustainability Disclosure Requirements and sustainable investment labels.
As part of its business plan for 2021-22 the FCA is also intending to promote “active investor stewardship that supports a market-led transition to a more sustainable future”.