The UK’s financial supervisor still sees shortcomings in the asset management industry in regards to sustainable investment funds ahead of its publication of more stringent anti-greenwashing rules.
The UK Financial Conduct Authority, known as FCA, has reported the results of a review that has identified significant gaps in the implementation of its ‘Guiding Principles’ for environmental, social, and governance (ESG) and sustainable investment funds. Despite efforts by most UK fund managers, its review underscores the need for further improvement in the sector.
This review comes as the FCA prepares to finalise its rules and guidance on Sustainability Disclosure Requirements (SDR) and an investment labels regime. The FCA’s scrutiny is part of a broader initiative to enhance transparency and accountability in sustainable investing, a rapidly growing sector in the UK’s financial landscape.
“The UK’s asset management sector is world leading and we want to keep it that way,” Camille Blackburn, FCA director of wholesale buy-side, said in a statement. “The changes we are making to the regulatory regime through upcoming rules on labelling will help retail investors and consumers understand and be confident in knowing exactly what they are investing in.”
Boards told to act
“We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices,” Blackburn said.
The FCA’s actions and comments on sustainable disclosure are watched with great interest on the other side of the Channel. The UK regulator is due to present details on a sustainability labelling regime for investment funds soon. Reactions to these steps are expected to feed into a EU consultation on the Sustainable Finance Disclosure Regulation that closes before Christmas.
The FCA acknowledged several areas of good practice among UK fund managers. Notably, the development and application of ESG and sustainability scoring systems and benchmarks have shown progress. Additionally, the FCA commended the comprehensive due diligence conducted by AFMs on third-party data providers.
Fund names still disputed
However, the review also revealed that many firms were found lacking in aligning their products with their stated ESG and sustainability goals, particularly when these goals were referenced in the fund’s name. In some cases, fund holdings seemed inconsistent with ESG or sustainability objectives, with fund managers unable to satisfactorily explain how these investments align with their goals.
Another critical issue identified was the lack of clarity and context in key ESG and sustainability information disclosures. This inadequacy makes it challenging for retail investors and consumers to access relevant information easily and understand what they are investing in.
Furthermore, the FCA found deficiencies in the design of fund manager’s stewardship approaches. The regulator noted difficulties in identifying the aims of stewardship activities, their alignment with fund objectives, and evidence of progress against these aims.