FCA publishes guiding principles to improve the quality and clarity of ESG and sustainable investments | Akin Gump Strauss Hauer & Feld LLP
The Financial Conduct Authority (FCA) has written to Presidents of Authorized Fund Managers (AFMs) regarding their expectations on the quality of information provided to investors of investment-oriented investment funds in an environmentally aligned manner, social and governance (ESG) themes. FCA notes that as the market for ESG-related investment opportunities grows in the retail sector, it is essential that funds marketed with a focus on sustainability and ESG provide clear descriptions. of their investment strategies, and that any promotional communication highlighting their objective contain accurate, reasonable and justified information.
The FCA has expressed concern that documents submitted to it as part of authorization applications for retail ESG funds do not comply with regulatory standards for authorized funds, often including “allegations that do not stand up to scrutiny ”. Concerns about “greenwashing” practices echo those expressed by other regulators, notably those in the European Union and the United States. While the letter is addressed to retail fund managers, the content and guiding principles set out in the letter are informative for managers who strive to apply best practices and are keen to avoid greenwashing, including those operating in wholesale markets.
This can indicate gaps in the AFM product design process, and applications where such gaps have been identified are clearly unlikely to be approved. FCA has expressed its expectation to see hardware improvements in future applications; continuous clear and accurate information to the investor when funds make ESG-related claims; and evidence that the funds are in fact achieving their stated objectives and / or strategy.
While the FCA supports innovation in the sustainable investment market and clearly recognizes the challenges the industry faces in improving the availability and quality of ESG data, it is keen to ensure a clear message to industry that it takes seriously its goal of building confidence in the sustainable investment market through high quality regulation, and will expect companies to put investor interests at the center of their activities. In this context, the FCA will particularly focus on the suitability of the products offered by the companies regulated by the FCA. The FCA stresses the importance of a well-functioning sustainable investment market for an appropriate allocation of private capital in pursuit of the UK’s political commitments and goals of achieving a net zero economy. Investor confidence underpins an efficient sustainable investment market that FCA sees as a prerequisite for the efficient use of private investor capital to finance structural transformation towards a more sustainable economy.
The FCA set out some “guiding principles” in its letter (and discussed in more detail in our customer alert on the same subject), intended to support companies in the design, delivery and publication of sustainable investment funds. The guiding principles were developed to be consistent with future forward-looking disclosure rules for sustainable investment funds, including proposed sustainability disclosure requirements that would apply to the whole economy ( and not just listed companies and companies in the financial services sector), sustainable investment labels improving comparability between products by standardizing and improving product disclosure regarding sustainability and impact. The guiding principles are also consistent with the climate-related disclosure requirements proposed by the Climate-Related Financial Information Working Group (TCDF) for asset managers and certain listed entities.
The guidelines will be useful in approaching the development of products intended to approximate the standards for Section 8 and Section 9 funds, and establish a common sense standard against which to evaluate marketing materials for success. ensure that they do not inadvertently distort the nature and extent of a fund’s commitment to sustainability. As more initiatives and requirements are produced, assistance in ensuring that business practices align with regulatory expectations for meeting legal obligations is crucial.