The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, announced today the publication of a letter to authorised fund managers indicating that applications for ESG-focused funds are frequently not meeting expectations, often making assertions about the sustainability aspects of funds not backed up by actual strategy or composition.
According to the letter, signed by Nick Miller, Head of Department, Asset Management Supervision at the FCA, investor demand for sustainable investment options are driving a high volume of applications for authorisation of new funds with an ESG focus and for existing funds amending their objectives accordingly.
Miller notes, however, that many of the funds are not able to back up their claims, writing:
“A number of these have been poorly drafted and have fallen below our expectations. They often contain claims that do not bear scrutiny. Also, we would have expected questions raised at the authorisation stage to have been asked (and addressed) in the product design phase.”
The letter expresses concern that these issues could lead to erosion of consumer trust in sustainable investing. Included in the application shortfalls were “instances where it was challenging to reconcile the fund’s proposed holdings with statements made setting expectations for consumers,” including sustainable investment funds with high-carbon emissions energy companies among the top holdings, as well as funds with misleading ESG-related names.
To help address these concerns, the letter includes a series of guiding principles for fund managers to use in their applications in order to ensure that ESG-related claims are not misleading and appropriately reflect the strategy and composition of the funds.
The principles issued by the FCA encompass the design of the funds and disclosure of their key elements, delivery of objectives and ongoing monitoring of the funds, as well as precontractual and ongoing disclosure aspects. The principles contain key considerations regarding fund names, communication of investment objectives and strategy, stewardship approach, ability to deliver on objectives, data & analytical tools, disclosure access and ongoing performance reporting, among others.
“The growth of investment funds whose strategy focuses on Environment, Social & Governance (ESG) themes has the potential to contribute meaningfully to addressing climate change and other sustainable investment goals. Consumers are placing significant value on ESG-related investment opportunities.
“It is therefore 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.”
Click here to access the full FCA letter and guiding principles.