ESG funds shortfall: FCA provides AFMs with homework as an early Christmas present

Nov 23rd '23

Authorised Fund Managers (AFMs) of funds with an Environmental, Social, and Governance (ESG) or sustainability emphasis have received a warning from the FCA on their management of these funds, ahead of the much anticipated Sustainability Disclosure Regulation (SDR) final guidelines.


In July 2021, the FCA sent a letter to AFMs titled “Dear Chair,” in which they outlined their expectations for the creation, administration, and disclosure of ESG and sustainability funds.  The letter reported a surge in the quantity of authorization requests for these kinds of money, many of which were deemed to be inadequately written and did not meet the required requirements.


There seem to be unresolved issues based on the most recent review. To stop consumers’ trust in ESG and sustainability products from further eroding, more work is required to ensure that money dedicated to these topics are properly overseen and that businesses are effectively communicating their policies.  People’s minds should be focused by this, particularly in light of the Greenwashing regulation that will take effect as soon as the SDR is announced in the coming weeks.


We advise setting yourself the following challenges to verify you are in line with FCA requirements and to get a jump start on SDR:


  • Design

Is there a direct connection between the ESG-related terms in the name of your fund—such as “impact,” “sustainable,” or “climate”—and the fund’s goal, strategy, and policy? Is this sufficiently reflected in the fund documentation?


Have you given any thought to how these funds’ ESG features are portrayed in the different fund documents, particularly with regard to their compliance with the requirements of Consumer Duty on Consumer Understanding?


If you claim that stewardship actions like voting and participation are an important component of the ESG strategy, are you being explicit about how these aid in the achievement of the investment goal, with the development and effect of these actions on the holdings being tracked and documented?


  • Delivery

Is there a written justification explaining how each asset in your sustainable and ESG funds contributes to the fund’s goal?


If there are any “unexpected” holdings in the fund, are you giving investors more details about them so they can understand why the fund has them?


Do you feel confident that sufficient due diligence has been done on the data, such as ESG data and rating providers, and that the data used to support investment rationales is reliable?


  • Disclosure

Have you verified that the investor-facing documentation for your ESG and sustainable funds is understandable, equitable, and free of deceptive practices, and that even seemingly complicated information—like emissions data—is understandable to investors?


Have you verified that firm-level guidelines, such as voting procedures or minimal ESG standards, that are posted on your website and included in fund paperwork are accurate and current with respect to the current workflow?


Have you mentioned all pertinent restrictions, including the availability, consistency, and quality of the data as well as any potential effects on the fund?


  • Governance

Are the sustainability and ESG aspects taken into account in your product governance procedures?


Are those engaged sufficiently skilled to question ESG aspects in an appropriate manner?


Does the AFM Board receive enough information about compliance with investment goals, policies, and strategies to enable them to exercise proper oversight?


The SDR final rules are another early Christmas present that we anticipate receiving soon, so please get in touch with us if you need assistance opening them or would like an end-of-year health check on any of the aforementioned areas to make sure you’re on the FCA’s “nice” list.


If you have any queries about Compliance impacts on the ESG space,

please contact us.


Read: Integrating ESG factors into investment decisions: a guide for compliance professionals


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