FCA finds further work required to fully embed ‘Guiding Principles’ for ESG and sustainable investment funds

The FCA is publishing this review[1] ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.

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.

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 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 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, 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.

'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 will continue to monitor the market to make sure firms and the investment products they provide to the market meet the regulator’s expectations. 

Notes to editors

1. Read the multi-firm review[1].
2. In July 2021, we issued a Dear Chair letter[2] to authorised fund managers. This set out a series of guiding principles for the design, delivery, and disclosure of sustainable investment products.
3. Proposed Sustainability Disclosure Requirements (SDR) and Investment Labels rules and guidance (CP22/20[3]) will be of relevance to AFMs.
4. Our proposals support the delivery of the Government’s ambition for Sustainability Disclosure Requirements and labels, set out in the Roadmap to Sustainable Investing[4] published in October 2021. 
5. Find out more information about the FCA[5].