The Financial Conduct Authority (FCA), the conduct regulator for financial services providers and financial markets in the UK, today announced the results of a study into fund managers’ compliance with regulatory requirements relating to the design and disclosure of ESG and sustainable investment funds. This indicates that many companies do not yet meet expectations and that products often do not meet the set sustainability objectives.
The FCA assessment anticipates the regulator’s publication of the final rules and guidance on the Sustainability Disclosure Requirements (SDR) and the investment label regime. The SDR forms a key part of the UK Green Finance Strategy, which aims to establish Britain as a center for international green finance, and align the financial sector and capital flows to achieve global and domestic climate and environmental objectives.
The disclosure and labeling rules aim to improve transparency through common standards and clear terminology and product classification to help investors navigate the rapidly growing and expanding sustainable investment landscape, and to help reduce the risk of greenwashing.
When the rules are implemented, asset managers will be required to disclose how they take sustainability into account, how they manage sustainability risks, opportunities and impacts and report on the sustainability features of the investment products and portfolios they offer. The FCA is also working on the implementation of an investment label system with information about the sustainability features of investment products.
The research found that fund managers have made progress in meeting expectations, including in the development and use of appropriate ESG and sustainability scoring systems and benchmarks, as well as evidence of good practice with fund managers carrying out thorough due diligence on external data providers. .
However, despite the progress, the FCA said the review showed that further progress is needed as many firms are still not meeting expectations, particularly in terms of disclosure and clarity of information given to retail investors and consumers. According to the report, key areas of poor practice included products that were inconsistently aligned with their ESG and sustainability objectives, even when the objectives were referenced in the names of the funds, fund investments that appeared inconsistent with the ESG and sustainability objectives of the fund, and important ESG information that was often not explained or included in the disclosure, and the design of the stewardship approaches that did not meet expectations.
Camille Blackburn, Director of Wholesale Buy-Side at the FCA, said:
“The UK asset management industry is leading the world and we want to keep it that way. The changes we are making to the regulatory regime through the upcoming labeling rules will help retail investors and consumers understand and feel confident that they know exactly what they are investing in.”