Sustainable and ESG fund investments and stewardship activities in the UK do not meet the Financial Conduct Authority’s (FCA) sustainability principles, the regulator has said ahead of the publication of its Sustainability Disclosure Requirements (SDR).
a review published today assessed by the FCA on how fund managers are implementing the guiding principles it set out in 2021. It focused on active and passive retail funds that included a reference to ESG and/or sustainability-related terms in their names, such as ‘responsible’, ‘ethical’, ‘climate’ or ‘social’, and asked twelve fund managers to provide an overview of their ESG and sustainability approach.
The FCA said that while evidence of good practice and intention to embed the guiding principles has been found, further improvement is needed.
In particular, it found that, despite some products having a reference to ESG or sustainability in their names, some did not have an explicit ESG or sustainability objective (although ESG and sustainability outcomes were typically reflected in the investment policy and/or strategy). In some cases, fund investments were even inconsistent with a fund’s ESG or sustainability objectives and companies were unable to explain why.
The evaluation also said that “stewardship approaches generally did not meet our expectations.” It found that stewardship activities were difficult to identify from the fund literature and that there was a lack of clear examples of progress.
“Some companies appeared to rely heavily on stewardship activities without being able to demonstrate how they identified, assessed and monitored results and how these related to funds’ investment objectives,” the report said.
When making disclosures, the FCA found that ESG and sustainability information was often not included, and that company-level disclosures were not easily reconciled with fund-level disclosures. In a number of cases, important ESG and sustainability information was not clearly presented and made accessible.
In terms of governance, the evaluation found that fund managers need to refine their existing oversight and controls, and that governance documents and management information were often lacking.
“Embedding the guiding principles and good practices we identified in our research will help companies comply with the proposed new requirements under the SDR and investment label rules, in addition to their consumer rights obligations,” says Camille Blackburn, director of wholesale buy-side at the FCA, commented.
“We expect boards to take the lead in monitoring and ensuring that companies make any changes necessary to further improve sustainability disclosure and practices.”
The FCA is expected to publish its final SDR proposals soon.
Blackburn added: “The changes we are making to the regulatory regime through upcoming labeling rules will help retail investors and consumers understand and have confidence that they know exactly what they are investing in.”