On 16 November 2023, the FCA published the results of its multi-firm review which tested how authorised fund managers (AFMs) are embedding the ‘Guiding Principles’, which were set out in a Dear Chair letter in July 2021, for ESG and sustainable investment funds.

The FCA has published the review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.

In its review the FCA found that, while most AFMs have made efforts to comply with the FCA’s expectations on the design, delivery and disclosure of their ESG and sustainable funds, further improvement is needed, particularly around the disclosure and clarity of information being given to retail investors and consumers. The FCA also 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 were not 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.

Examples of good practice identified included the development and use of appropriate ESG and sustainability scoring systems and benchmarks, and AFMs conducting thorough due diligence on third party data providers.

The FCA noted that embedding the Guiding Principles and the good practice identified in its review will help firms to comply with proposed new requirements under the SDR and investment labels rules, alongside their Consumer Duty obligations. It expects boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices and will continue to monitor the market to make sure firms and the investment products they provide to the market meet its expectations.

For further updates on regulatory developments in the ESG space please visit our Financial Services Regulatory Developments in ESG hub.