UK financial watchdog warns green fund managers ‘improvements are needed’
A review by the Financial Conduct Authority has found that while most fund managers have made efforts to comply with the FCA’s expectations on the design, delivery, and disclosure of their green and sustainable funds, further improvement is urgently needed.
Britain's financial watchdog has published a review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.
The FCA said it "expects firms to address good and poor practices", as the regulator put it, to meet the requirements of SDR and the Consumer Duty.
The FCA review found evidence of good practices, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks.
The review also highlighted good practice where AFMs conducted thorough due diligence on third party data providers.
The FCA did find that many green fund managers still "have further to go to meet expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers."
The watchdog said it also found other examples of poor practice including products were inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name.
In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives, and some AFMs weren’t able to explain how these investments fit with their goals.
Key ESG and sustainability information was often not explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors, according to Camille Blackburn, director of wholesale buy-side at the FCA.
"It was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives, and examples of the progress they made against those aims," she said.
Moreover, the design of AFMs’ stewardship approaches did not meet the FCA’s expectations, Blackburn added.
“The UK’s asset management sector is world leading and we want to keep it that way."
"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."
Blackburn added that “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."
She warned fund managers that the FCA will continue to monitor the market to make sure firms and the investment products they provide to the market meet the regulator’s expectations.
Responding to the FCA findings, Nathaniel Lalone, financial markets and funds partner at Katten Muchin Rosenman, told Net Zero Investor that “engendering trust in the sustainable investment market is critical to its success and for the UK to reach its net zero targets."
She stressed that "this report shows that while progress has been made much work remains to be done. Market participants should be prepared for the FCA to have little patience for poor behaviours in this space.”