Fund managers in the UK are not meeting the Financial Conduct Authority’s (FCA) sustainability guiding principles, according to the regulator ahead of the publication of its Sustainability Disclosure Requirements (SDR).
In its review published today, the FCA said while most fund management firms had made “efforts to comply” with its expectations around the design, delivery and disclosure of their ESG and sustainable funds, “further improvement is needed.”
The review assessed the progress fund managers had made implementing the guiding principles set out in 2021.
It focused on active and passive retail funds that included a reference to environment, social and governance (ESG) and/or sustainability-related terms in their name, such as ‘responsible’, ‘ethical’, ‘climate’ or ‘social’, and asked 12 fund managers to provide an overview of their ESG and sustainability approaches.
More specifically, it found despite some products having a reference to ESG or sustainability in their name, some did not have an explicit ESG or sustainability objective.
However, ESG and sustainability outcomes were typically reflected in the investment policy and/or strategy.
In some cases fund holdings were actually inconsistent with a fund’s ESG or sustainability objectives and firms weren’t able to explain why.
The review also said “stewardship approaches generally did not meet our expectations”. It found stewardship activities were difficult to identify from fund literature and there was a lack of clear examples of progress.
“Some firms appeared to rely heavily on stewardship activities without being able to demonstrate how they set, assessed and monitored outcomes, and how these linked to the investment objectives of funds,” it said.
On disclosure, the FCA found ESG and sustainability information often not included, and firm-level disclosures were not easily reconcilable with fund-level disclosures.
In several cases, key ESG and sustainability information was not clearly presented and made accessible.
As to governance, fund managers need to refine their existing oversight and controls and said governance records and management information were often lacking.
Camille Blackburn, director of wholesale buy side at the FCA, said the UK asset management space was “world leading” and the upcoming changes on how ESG themed retail products are labelled “will help retail investors and consumers understand and be confident in knowing exactly what they are investing in”.
She added, “Embedding the Guiding Principles and the good practice we have identified in our review will help firms to comply with proposed new requirements under the SDR and investment labels rules, alongside their Consumer Duty obligations.
We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.”
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