FCA publishes review findings of AFM compliance with ESG Guiding Principles

22 Nov

The FCA has published findings of a review it conducted to understand how well Authorised Fund Managers (AFMs) are embedding its Guiding Principles on the design, delivery and disclosure of ESG and sustainable investment funds. See details of the review here.

The FCA’s Guiding Principles describe its expectations for ESG/sustainable investment funds. The review findings are intended to help AFMs improve their approaches to implementing the Principles and prepare for the more stringent rules expected with the release of SDR (due in December) and new rules on Consumer Duty (which came into effect on 31 July 2023).

Findings

The FCA noted that the review revealed “good intent” and “some good practice” on the part of firms seeking to embed the Guiding Principles. However, it also found that the “disclosure principle had not been fully embedded” consistently meaning that important ESG information was either not included or was hard to identify thus limiting investors’ ability to make informed decisions. It also found AFMs were struggling with the governance and oversight of older funds particularly those that had been adjusted to incorporate ESG and sustainability objectives and policies post-launch.

Key findings

Though some products mentioned ESG or sustainability in their name, others did not have an explicit ESG or sustainability objective.
The design of stewardship approaches fell short of FCA expectations. The FCA noted they often find it 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 and the FCA found the contribution of an individual fund to firm-wide ESG and sustainability goals was often not disclosed.
In a number of cases, key ESG and sustainability information was not clearly presented and made accessible.

Next steps

The FCA now expects firms to review:

ESG and sustainable fund ranges and assess whether disclosure material meets the requirements of FCA rules and the expectations set out in our Guiding Principles letter.
Oversight and controls frameworks to ensure they manage the risks of misleading or inaccurate information and that the FCA’s Guiding Principles and expectations are appropriately embedded in their processes.