FCA Identifies Room for Improvement in ESG and Sustainable Investment Fund Practices

The Financial Conduct Authority (FCA) has released findings from its recent review, indicating that although many Authorised Fund Managers (AFMs) have taken steps to comply with the FCA's expectations regarding Environmental, Social, and Governance (ESG) and sustainable funds, further enhancements are required.

The review, published ahead of the finalization of rules and guidance on Sustainability Disclosure Requirements (SDR) and the investment labels regime, reveals a mixed landscape of good and poor practices among AFMs in their design, delivery, and disclosure of ESG and sustainable funds.

While the FCA acknowledged instances of positive practices, such as the development and utilization of appropriate ESG and sustainability scoring systems, as well as thorough due diligence on third-party data providers, it emphasized the need for improvement. The FCA identified areas where firms must address shortcomings to meet the requirements of SDR and the Consumer Duty.

One notable positive aspect highlighted in the review was the implementation of ESG and sustainability scoring systems and benchmarks, showcasing a commitment to responsible investment practices. However, despite progress, the FCA raised concerns about the inconsistency in aligning products with their stated ESG and sustainability goals, even if referenced in their names.

A significant finding was the inconsistency between fund holdings and their ESG or sustainability objectives, with some AFMs unable to clarify the alignment of certain investments with their stated goals. The review also flagged issues related to the accessibility and clarity of key ESG and sustainability information in disclosures, hindering retail investors and consumers from making informed decisions.

The design of AFMs' stewardship approaches was another area of concern, as the FCA noted difficulties in identifying the precise aim of stewardship activities, their alignment with fund objectives, and examples of progress made against those aims.

Camille Blackburn, Director of Wholesale Buy-Side at the FCA, stressed the importance of embedding the Guiding Principles identified in the review. She emphasized that these changes would assist firms in complying with the upcoming rules on labeling, enabling retail investors and consumers to understand and have confidence in their investments.

Blackburn stated, "The changes we are making to the regulatory regime through upcoming rules on labeling will help retail investors and consumers understand and be confident in knowing exactly what they are investing in."

The FCA expects boards to take a leading role in monitoring and ensuring that firms make necessary changes to enhance sustainability disclosures and practices. The regulatory body will continue to closely monitor the market to ensure that firms and their investment products align with the expectations outlined in the review.

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