Sustainable and ESG fund holdings and stewardship activities in the UK are not meeting the Financial Conduct Authority’s (FCA) sustainability guiding principles, the regulator has said ahead of the publication of its Sustainability Disclosure Requirements (SDR).
A review published today by the FCA assessed how fund managers are implementing the guiding principles it set out in 2021. It focused on active and passive retail funds that included a reference to ESG and/or sustainability-related terms in their name, such as ‘responsible’, ‘ethical’, ‘climate’ or ‘social’, and asked 12 fund managers to provide an overview of their ESG and sustainability approaches.
The FCA said while it found evidence of good practice and intent to embed the guiding principles, further improvement is needed.
In particular it found despite some products having a reference to ESG or sustainability in their name, some did not have an explicit ESG or sustainability objective (although ESG and sustainability outcomes were typically reflected in the investment policy and/or strategy). In some cases fund holdings were actually inconsistent with a fund’s ESG or sustainability objectives and firms weren’t able to explain why.
The review also said “stewardship approaches generally did not meet our expectations”. It found stewardship activities were difficult to identify from fund literature and there was a lack of clear examples of progress.
“Some firms appeared to rely heavily on stewardship activities without being able to demonstrate how they set, assessed and monitored outcomes, and how these linked to the investment objectives of funds,” it said.
On disclosure, the FCA found ESG and sustainability information often not included, and firm-level disclosures were not easily reconcilable with fund-level disclosures. In a number of cases, key ESG and sustainability information was not clearly presented and made accessible.
On governance, the review found fund managers need to refine their existing oversight and controls and said governance records and management information were often lacking.
“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, alongside their Consumer Duty obligations,” Camille Blackburn, director of wholesale buy-side at the FCA, commented.
“We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.”
The FCA is expected to publish its final SDR proposals imminently.
Blackburn added: “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.”
Speaking at a UKSIF event today, Sacha Sadan, director of ESG at the FCA, said: “When we have launched the articles around labelling and naming, we’ll be able to show that it is not just an academic exercise and that we‘ve learned from real, practical examples, answering questions such as ‘What did we see that did work?’ and ‘How can we revise it?’
“We also asked for direct feedback from those people who were part of the review, because the idea is to help them so they can move on through this journey, especially with Consumer Duty.”
This article was updated to include Sadan’s comment.