The Financial Conduct Authority (FCA) recently conducted a review of how Authorized Fund Managers (AFMs) are embedding the FCA’s guiding principles for ESG in their sustainable investment funds. The report found that while some AFMs were incorporating the guidance well, there were still substantial problems in the industry. They summarized their findings as follows:
- “Despite some products having a reference to ESG or sustainability in their name, 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).
- The design of AFMs’ stewardship approaches generally did not meet our expectations. It was often difficult to identify the nature of stewardship activities from fund literature alone and identify clear examples of progress from engagement.
- In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives. Some AFMs were not able to explain how these holdings were consistent with the ESG or sustainability characteristics of the fund.
- Key ESG and sustainability information was often not explained or put into context in disclosures. In some instances, relevant ESG and sustainability information was not included in disclosures.
- Firm-level disclosures were not easily reconcilable with fund-level disclosures. We often found the contribution of an individual fund to firm-wide ESG and sustainability goals was not disclosed.
- In a number of cases, key ESG and sustainability information was not clearly presented and made accessible.”
This review comes before a new package of legislation in the UK aims to take on sustainable finance. The Sustainability Disclosure Requirements (SDR) and Investment Labels rules are intended to solve many of the problems the FCA found. Sustainable finance continues to evolve as regulators attempt to reign in greenwashing. The UK’s upcoming rules may help illuminate a path forward for other market regulators as effective solutions have thus far remained elusive.
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