Regulation  

FCA warns on 'poor-quality' ESG fund applications

FCA warns on 'poor-quality' ESG fund applications

Applications for ESG funds must improve, the Financial Conduct Authority has said in a letter to the chairmen of authorised fund managers, as it outlined guiding principles for the products.

In the nine-page letter released today (July 19), Nick Miller, head of the FCA’s asset management supervision department, said the regulator had seen a high volume of applications for the authorisation of funds with an ESG focus.

Miller said although the FCA welcomed innovation within the sustainable investment market, it recognised that “innovation and the rapid pace of change present the industry with challenges”, such as around ESG-related data and metrics. 

He added: “Against this backdrop, we are concerned by the number of poor-quality fund applications we have seen and the impact this may have on consumers. This must improve.” 

To this end, the city watchdog has created guiding principles for fund managers, to be used pre and post-authorisation, to help AFMs ensure that they are complying with existing ESG requirements.

The letter said: “If consumers understand the basis on which sustainability claims are being made by AFMs, and can monitor whether those claims are being met, this should improve the functioning of the market.

"It will reduce the risk that they buy products that do not meet their needs and create greater trust in ESG products.”

The FCA clarified that the guiding principles were not the “end point” of sustainability guidelines, rather they have been developed with the aim of being “compatible” with prospective future disclosure rules.

FCA guidelines for ESG funds

The guidelines are broken down into three categories.

The first refers to the fund’s documentation, including ensuring the fund’s name and any financial promotions fairly reflect the fund’s strategy.

The second principle is the delivery of the fund, and includes ensuring resources used by a firm in regards to the fund are appropriate (including skills, experience, technology, research, data and analytical tools). 

The final principle relates to the fund’s disclosures, which the FCA said should be easily available to consumer and contain information that helps them makes investment decisions, avoiding jargon and technical terms where appropriate.

There is currently no regulatory green taxonomy for ESG products in the UK, after the Treasury decided not to implement the EU’s taxonomy in the wake of Brexit.

However, the government has created a working group to help it create a framework.

The Green Technical Advisory Group (GTAG) will oversee the delivery of the green taxonomy in the UK, giving advice to the government on developing the framework, supporting investors, consumers and businesses to make green financial decisions and will clamp down on greenwashing. 

GTAG will be chaired by the Green Finance Institute, and will be made up of financial and business stakeholders, taxonomy and data experts, as well as subject matter experts from the Environment Agency, the Committee on Climate Change, NGOs and academia.

sally.hickey@ft.com