A review published today by the FCA said 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 review is a follow-up to the FCA’s Dear Chair letter sent to the chairs of AFMs in July 2021. That letter gave guidance on the regulator’s existing requirements through a set of Guiding Principles that explained expectations in this area.

The FCA published this review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime. 

Role of asset managers

Asset managers offer a range of investment products to consumers, including products that aim to deliver ESG and sustainable investment goals in addition to a financial return. To maintain trust, investors need to be able to distinguish between the different claims AFMs make about their ESG and sustainable products and to be able to rely on the integrity of the disclosures marketed to them.

The FCA expects firms to address the good and poor practices outlined in the report to meet the requirements of SDR and the Consumer Duty (Principle 12). 

“We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.” 

Camille Blackburn, Director of Wholesale Buy-Side, FCA

Review findings

The FCA review found evidence of good practice, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks. The review also highlighted good practice where AFMs conducted thorough due diligence on third party data providers.  

While progress has been made, the FCA said 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 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, the FCA’s Director of Wholesale Buy-Side, 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.  

“Any AFM that has work to do following today’s report should act now.”

Nathaniel Lalone, Financial Markets and Funds Partner, Katten Muchin Rosenman UK LLP

“Embedding the Guiding Principles and the good practice we have identified in our review will help firms to comply with proposed new requirements under the SDR and investment labels rules, alongside their Consumer Duty obligations. 

“We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.”  

Advice to asset managers

Nathaniel Lalone, Financial Markets and Funds Partner at Katten Muchin Rosenman UK LLP, said: “Engendering trust in the sustainable investment market is critical to its success and for the UK to reach its net zero targets. This report shows that while progress has been made, much work remains to be done. Market participants should be prepared for the FCA to have little patience for poor behaviors in this space.”

Asked if he foresees future FCA action for non-compliance. Lalone said: “Not necessarily. My view is that the FCA is engaged in a campaign of moral suasion with the AFM industry to embed good practices in relation to ESG and sustainable investment activities. The FCA has been clearly – and repeatedly – communicating its expectations in this space and so it would be foolish for an AFM to simply look the other way and not take this guidance on board.”

We also asked about other requirements AFMs will be subject to. Lalone said: “As noted in the report itself, AFMs will be subject to the proposed Sustainability Disclosure Requirements and Investment Labels rules once they are adopted. This package of SDR measures will be a further evolution of the regulatory expectations around sustainable investments, which means any AFM that hasn’t already brought itself up to the FCA’s current expectations will have just that much further to go to comply with SDR. In other words, any AFM that has work to do following today’s report should act now.”

The FCA said it will continue to monitor the market to make sure firms and the investment products they provide to the market meet the regulator’s expectations and support the delivery of the Government’s ambition for Sustainability Disclosure Requirements and labels, set out in the Roadmap to Sustainable Investing published in October 2021.