The UK’s Financial Conduct Authority (FCA) has conducted a recent review that shows that while most Authorised Fund Managers (AFMs) have made efforts to comply with the regulator’s expectations on the design, delivery, and disclosure of their ESG and sustainable funds, further improvement is needed.
The FCA published the review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.
The regulator expects asset managers to address the good and poor practices outlined in the report to meet the requirements of SDR and the Consumer Duty, it added.
The FCA review found evidence of good practice, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks. It also highlighted good practice where AFMs conducted thorough due diligence on third party data providers.
“While progress has been made, the FCA has found that many firms still have further to go to meet its expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers,” the FCA stated.
The FCA has found other examples of poor practice including:
- products were inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name;
- in some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives, and some AFMs weren’t able to explain how these investments fit with their goals;
- key ESG and sustainability information was often not explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors;
- the design of AFMs’ stewardship approaches did not meet the FCA’s expectations. It was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives, and examples of the progress they made against those aims.
Camille Blackburn, director of wholesale buy-side at FCA, said: “The UK’s asset management sector is world leading and we want to keep it that way. The changes we are making to the regulatory regime through upcoming rules on labelling will help retail investors and consumers understand and be confident in knowing exactly what they are investing in.”
Blackburn added that embedding the Guiding Principles and the good practice the FCA has identified in its review will help firms to comply with proposed new requirements under the SDR and investment labels rules.
“We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices,” Blackburn said.
The FCA will continue to monitor the market to make sure firms and the investment products they provide to the market meet the regulator’s expectations.