Written by Pooja Bokhiria
On 19 July 2021, the Financial Conduct Authority (‘FCA’) published a Dear Chair letter setting out its expectations on the design, delivery and disclosure of environmental, social and governance (‘ESG’) and sustainable investment funds.
The FCA acknowledges that ESG and sustainable investment funds are the fastest growing segment of the European funds market and that, accordingly, it receives a high volume of applications for the authorisation of funds with a sustainable focus. However, the FCA states that these applications are falling below its expectations. Furthermore, the FCA expects clear and accurate ongoing disclosures to consumers where funds make ESG-related claims.
Consequently, the FCA has introduced guiding principles to help firms apply the rules to ESG and sustainable investment funds. These guiding principles apply to firms that make ESG-specific claims but not to those that integrate ESG considerations into their mainstream investment processes. They consist of an overarching principle and three supporting principles, each of which is accompanied by a set of ‘key considerations’ and ‘interpretation/application examples’.
The overarching principle is consistency, whereby a fund's ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure. A fund's focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy, and its holdings.
The supporting principles are:
- The design of responsible or sustainable investment funds and disclosure of key design elements in fund documentation. References to ESG (or related terms) in a fund’s name, financial promotions or fund documentation should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or investment policy and strategy of the fund.
- The delivery of ESG investment funds and ongoing monitoring of holdings. The resources (including skills, experience, technology, research, data and analytical tools) that a firm applies in pursuit of a fund’s stated ESG objectives should be appropriate. The way that a fund’s ESG investment strategy is implemented, and the profile of its holdings, should be consistent with its disclosed objectives on an ongoing basis.
- Pre-contractual and ongoing periodic disclosures on responsible or sustainable investment funds should be easily available to consumers and contain information that helps them make investment decisions. ESG/sustainability-related information in a key investor information document should be easily available and clear, succinct and comprehensible, avoiding the use of jargon and technical terms when everyday words can be used instead. Funds should disclose information to enable consumers to make an informed judgement about the merits of investing in a fund. Periodic fund disclosures should include evaluation against stated ESG/sustainability characteristics, themes or outcomes, as well as evidence of actions taken in pursuit of the fund’s stated aims.
The guiding principles are intended to complement the FCA’s June 2021 consultation paper (CP21/17) on climate-related disclosure rules for asset managers and other types of firms.
For further information, a copy of the FCA’s Dear Chair Letter can be found here.