FCA to assess Asset Managers’ ESG and Sustainability claims

The UK regulator, the Financial Conduct Authority (FCA) has announced it will be testing the ESG claims asset managers make to their investors to ensure they are doing what they claim in their marketing communications.

In a so-called “Dear CEO” letter published on 3rd February 2023, the FCA set out its expectations and assessment approaches aimed at tackling greenwashing and improving consumer confidence in the sector, which it says has been damaged by instances of “misleading and inaccurate” ESG claims.

The Asset Management Supervision Strategy will cover around 1,000 UK firms managing some £11 trillion in assets under management, with a particular focus on “outlier firms” who have already been identified as having weaker approaches to ESG risk assessment in previous supervisory or surveillance activities.

The FCA identifies “ineffective governance” as a “root cause” of some of the failings in the asset management sector, promising to assess “the effectiveness of firms’ governance in identifying, considering, and mitigating harms” in this latest strategy.

The FCA notes 5 risks, highlighting the main issues as well as its expectations of asset managers and its plans to assess each area.

Product governance

A lack of “quality and value of product offerings” and “quality of communications with customers” are noted as key drivers of the FCA’s plan to bring in a New Consumer Duty for financial services firms. With a focus on delivering better outcomes to consumers, the FCA advises firms to review and consider their responsibilities under the Duty and make any changes to governance that may be required to fulfil them. For its part, the FCA will be looking for firms, especially outliers, with lacking governance procedures.

Environmental, Social and Governance (ESG) and Sustainable Investing

Routing out “misleading and inaccurate” claims over ESG and sustainability is stated as the priority under this risk area. With a focus on the protecting the “integrity of the UK financial disclosure regime” and “consumers’ confidence to invest”, the FCA warns firms – especially outliers - it will be testing them on the claims they make to investors in their communications.   

The aim of this activity, it states, is to “ensure that governance bodies are appropriately structured to oversee and review management information about product development, ESG and sustainability integration in investment processes, third-party and proprietary ESG information providers, and other ESG and sustainability claims made by the firm”. The regulator also warns it will be using information from new sources (such as TCFD disclosures) and rules (e.g. from proposals in CP22/20 Sustainability Disclosure Requirements (SDR) and investment labels) to assess firms’ conduct on ESG.

Product Liquidity Management

The FCA warns of the risk of “liquidity mismatch” in open-ended funds, relating to the “terms at which investors can redeem and the time needed to liquidate fund assets to meet the redemption request”. The regulator goes on to advise firms to improve the oversight and consistent use of tools employed in liquidity risk management. Firms should ensure “operational systems and processes are fit for purpose” it says. For its part, the FCA will complete a “liquidity management multi-firm review” and expects firms to review their own governance of liquidity risks based on its findings.

Investment in Operations and Resilience

Warning of the risks to “service disruption or failure, with consequential loss to investors and detriment to markets” from underinvestment in operations, the FCA advises firms to review their “operational health” and be prepared to report on it. This includes information on third-parties, as well as internal policies and procedures. The regulator will also be testing asset managers’ ability to meet regulatory requirements and advises them to prepare by using the FCA cyber and operational resilience assessment tools and intelligence-led penetration testing scheme (CBEST).

Financial Resilience

Firms are advised to review their financial resilience and avoid failing by ensuring they have “sufficient capital and liquidity to operate, and that your governance processes allow for prudential health to be regularly and adequately assessed”. For those in scope, firms should review the FCA’s Investment Firms Prudential Regime (IFPR). Firms are further recommended to review wind-down procedures and rules around the safe custody of clients’ assets. The FCA will continue to “assess firms' prudential health using internal and external data sources”.

What to do next

The key message from the FCA is to review your approaches, especially to ESG and sustainability, and make sure you’re doing what you say you are. If you need help reviewing your policies and procedures and making sure they align with FCA and investor expectations, please get in touch.