FCA Issues Guiding Principles for Improving the Quality and Clarity of ESG and Sustainable Investments | Akin Gump Strauss Hauer & Feld LLP

The Financial Conduct Authority (FCA) has written to the Chairs of Authorized Fund Managers (AFMs) to express their expectations of the quality of information provided to investors in mutual funds with an environmental, social and regulatory focus (ESG ) Subjects. The FCA notes that, given the growing market for ESG-related investment opportunities in the retail sector, it is imperative that funds marketed with a sustainability and ESG focus include clear descriptions of their investment strategies and that any promotional communication detailing their ESG Focus or highlight their ESG strategies and contain accurate, reasonable and reasoned disclosures.

The FCA expressed concern that the documents submitted to it in connection with applications for approval for mutual ESG funds did not meet regulatory standards applicable to approved funds, including often “safe claims”. Concerns about “greenwashing” practices reflect those expressed by other regulators, including those in the European Union and the United States. Although the letter is aimed at mutual fund managers, the content and guidelines of the letter are informative for managers committed to best practice and interested in avoiding greenwashing, including those who operate in the wholesale markets.

This may indicate deficiencies in the AFM’s product development process and applications that have identified such deficiencies are clearly unlikely to be approved. The FCA expressed its expectation to see significant improvements in future applications; clear and accurate ongoing disclosures to investors when funds make ESG-related claims; and evidence that the funds are actually achieving their stated objectives and / or strategy.

While the FCA supports innovation in the sustainable investment market and clearly recognizes the challenges the industry is facing to improve the availability and quality of ESG-related data, it strives to ensure a clear message to the industry , who takes seriously its goal of building trust in the sustainable investment market through high quality regulation and expects companies to put investor interests at the center of their business operations. In this regard, the FCA will particularly focus on ensuring that the products offered by FCA regulated companies are suitable for the purpose. The FCA underlines the importance of a well-functioning sustainable investment market for the appropriate allocation of private capital in support of the UK’s political commitments and goals to achieve a net-zero economy. Investor confidence underpins an effective sustainable investment market, which the FCA sees as a prerequisite for the effective use of private capital of investors to finance structural change towards a more sustainable economy.

In its letter, the FCA formulated certain “guiding principles” (and discussed more fully in our Customer Alert on the same topic) that are designed to assist companies in designing, deploying and disclosing sustainable mutual funds. The Guiding Principles have been developed with a view to their compatibility with future disclosure requirements for sustainable investment funds, including the proposed sustainability disclosure requirements that would apply to the whole economy (and not only to publicly traded companies and companies in the financial services sector), labels for sustainable investments improve comparability between products by standardizing and improving product disclosure in terms of sustainability and impact. The Guiding Principles also align with the proposed Task Force on Climate-Related Financial Disclosures (TCDF) climate-related disclosure requirements for asset managers and certain publicly traded companies.

The Guiding Principles will be useful in developing products that approximate the standards applicable to Article 8 and Article 9 funds and will provide a reasonable standard for evaluating marketing materials to ensure that they do not inadvertently affect the nature and scope of the Sustainability commitments of a fund. As more initiatives and requirements evolve, helping to ensure that business practices are consistent with regulatory expectations for compliance with legal obligations is vital.