‘Further improvement’ needed to embed guidance into ESG funds – FCA

A review by the Financial Conduct Authority (FCA) has found that while most authorised fund managers (AFMs) have made efforts to comply with its expectations on the delivery of their ESG and sustainable funds, “further improvement” is needed.

The regulator is publishing the review ahead of its final rules and guidance on sustainability disclosure requirements (SDR) and investment labels regime.

Firms will be expected to address the good and poor practices outlined in the FCA’s report to meet the requirements of SDR and the Consumer Duty.

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.

However, while the regulator suggested progress has been made, the FCA also 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 found other examples of poor practice such as products being 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. The design of some AFMs’ stewardship approaches also did not meet the FCA’s expectations.

“The UK’s asset management sector is world leading and we want to keep it that way,” said director of wholesale buy-side at the FCA, Camille Blackburn.

“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.

“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.”

The FCA said it would continue to “monitor the market” to make sure firms and the investment products they provide to the market meet the regulator’s expectations.

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