FCA slams ESG fund applications for claims ‘that do not bear scrutiny’

The UK financial watchdog has written asset managers criticising them over the “poor quality” of applications they are submitting to launch sustainable funds.

Sustainable investment funds are a booming segment of the asset management sector, with assets hitting a record €1.1tn in Europe at the end of 2020 amid the launch of more than 500 new products.

However, as a flurry of activity to launch funds in the UK continues, the Financial Conduct Authority said it has spotted serious flaws in applications it has received to set up environmental, social and governance focused funds.

Nick Miller, head of asset management supervision at the FCA, said in the letter: “We have seen numerous applications for authorisation of investment funds with an ESG or sustainability focus.

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“A number of these have been poorly drafted and have fallen below our expectations. They often contain claims that do not bear scrutiny.”

Examples provided by the FCA include a proposed passive fund which had a misleading ESG-related name, given it was looking to track an index that did not hold itself out to be ESG-focused. It also had very limited exclusions from the index, based only on high-level ESG criteria.

Another proposed sustainable fund contained two high-carbon emissions energy companies in its top-10 holdings — normally at odds with an ESG fund —  without providing a reason for doing so.

Miller said that sustainable investment funds are currently the fastest growing segment of the European funds market, and welcomed some of the innovation that was occurring such as improvements in ESG-related data and metrics.

“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,” said Miller in the nine page letter.

“As the ESG and sustainable investment market grows, we have a role as the regulator to build trust in this segment of the market. We expect firms to play their part in this too; we want them to be putting consumers at the heart of their businesses, offering products and services that are fit for purpose and which they know represent fair value.”

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The FCA has created a set of guiding principles to help asset managers ensure disclosures “accurately reflect the nature of a fund’s responsible or sustainable investment strategy” both in pre-sale material and on an ongoing basis.

The principles cover the design, delivery and disclosure of responsible and sustainable investment funds.

“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,” Miller wrote.

To contact the author of this story with feedback or news, email David Ricketts

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