The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, has informed asset managers that it will be testing the ESG and sustainable investing claims made in their communications with investors, as part of its efforts to reduce greenwashing risk.
The warning forms part of a letter from the FCA to the leaders of asset management firms outlining the most likely harms to consumers or markets arising from asset managers’ business models, and its expectations of asset managers, as well as the FCA’s plans to address these areas.
Noting an increasing prominence of ESG and sustainable investing products over the past few years, the FCA letter highlights the risks that “some claims about ESG and sustainable investing are misleading or inaccurate,” and notes that this could negatively impact the confidence of consumers to invest, as well as undermining the allocation of capital aimed at delivering environmental and social outcomes.
In order to address the greenwashing risks, the FCA in its new letter said that it “will test whether firms deliver on the claims made in their communications with investors,” with a particular focus on “outlier firms” identified in previous supervisory activities or involved on ongoing surveillance.
The letter also indicates that the FCA will focus on ensuring that asset managers’ governance bodies are structured to oversee and manage information about product development, ESG and sustainability integration in the investment process, ESG information providers, and other sustainability claims made by the firms.
The notice follow the publication of a letter to asset managers by the FCA in July 2021, 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. In 2022, the FCA unveiled proposed rules for investment product sustainability labels and disclosure requirements as part of its efforts to reduce greenwashing, and announced that it would step up its supervisory engagement on sustainable finance and enhance its enforcement strategy.
The letter said that the FCA will soon publish a review it conducted of some firms’ ESG practices, and aims to publish the final decision on its product labelling and disclosure proposals.
Click here to access the FCA letter to asset managers.