The Financial Conduct Authority (FCA) has warned asset managers about the “poor quality” of many ESG fund launch applications it receives, which it said “must improve”.
In response, the regulator has developed a set of guiding principles, informed by stakeholder liaison and consumer research, to help firms apply its existing rules and ensure ESG-related claims are "clear and not misleading".
Head of asset management supervision at the FCA Nick Miller said in a letter to industry bosses, published today (19 July), that the regulator receives "a high volume" of applications for authorisation of funds with a sustainable focus, "many" of which are "poor quality" and "fall below our expectations".
"We also expect clear and accurate ongoing disclosures to consumers where funds make ESG-related claims," he added.
The FCA cited booming investor interest in ESG-related funds and the consequential response from the asset management industry to provide supply to that demand. As well as the large volume of new launches the FCA also noted the number of existing funds amending objectives to meet this demand.
"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," it said. "This must improve."
The FCA gave examples of the "poor" applications it receives, such as a proposed passive fund that had an ESG-related name the regulator "found misleading" as it was looking to track an index that was not itself ESG-focused. It also had very limited exclusions from the index, based on high-level ESG criteria.
Going forward, the FCA said it would "continue to challenge firms" to help ensure that new or repurposed funds submitted for authorisation "meet our regulatory requirements".
"We want firms to communicate clearly and avoid making misleading claims, both at the time of application and on an ongoing basis," explained Miller. "Where firms are providing an ESG service as part of a fund's offering, we expect them to be able to explain to us how they have considered the quality of this service in the context of the fees they are charging.
"There are clear requirements on firms that they should be meeting in respect of the funds they provide."
In order to "reinforce" its expectations, both pre- and post-authorisation, the FCA has developed guiding principles, also published today, covering the design, delivery and disclosure of responsible and sustainable investment funds.
"When submitting fund applications, and in managing funds on an ongoing basis, we consider that the guiding principles will help you get it right," Miller told fund management bosses.
"Where your funds make ESG or sustainable related claims, you should consider how you clearly and accurately disclose and reflect the nature of the fund in line with those claims to enable consumers to make an informed judgement about the merits of investing in a fund."
Commenting on the FCA's intervention, director for investments and capital markets at the Investment Association Galina Dimitrova said: "Today's savers want to understand the impact of their investments on the world around them, and that means giving them confidence that when they buy a responsible and sustainable investment product, it matches their expectations.
"That is why we are working with investment managers to ensure greater clarity and consistency when describing products to clients, to make it easier for all savers to better understand the opportunities available to them. We welcome the FCA's guiding principles on design, delivery and disclosure of ESG and sustainable investment funds. These principles are an important part of ensuring a well-functioning fund market with the consumer at the core."