The FCA have issued a Dear AFM Chair letter on improving quality and clarity relating to authorised ESG and sustainable investment funds. The letter details a new set of guidelines for investment funds with the aim of boosting trust in the market to ensure that fair value is provided to consumers and to help AFMs comply with existing regulatory requirements.
ESG products are in high demand, and the market for ESG related products is evolving. The FCA are seeing many new (and some innovative) ESG fund applications rolling in. In response to these applications they have issued this letter, stating that many of the applications have fallen short of their standards by advertising funds with an ESG theme but then failing to deliver. Some examples include:
In order to combat this the FCA have constructed three guiding principles, centring around one ‘overarching’ principle: consistency. Developed in reference to existing legal requirements (such as their general guiding principles), these guidelines will help firms to stay compliant and ensure value is provided to consumers.
The three principles can be explained as follows:
Principle 1: The marketing of funds as ESG-related should reflect the characteristics of their objectives and/or investment policy.
This is particularly in relation to consistency across fund names/marketing, fund objectives & performance monitoring, stewardship (if applicable) and a commitment to make all of this information available to consumers.
Principle 2: A fund should ensure the achievability of its ESG objectives on an ongoing basis.
This can be achieved by ensuring that the fund has adequate resources to achieve its objectives, which could include skilled investment professionals or the use of technological inputs/research for which due diligence should be carried out.
Principle 3: ESG related information should be available to consumers before investment and on an ongoing basis.
This focuses on ESG information being: easily accessible to investors (i.e. including explanations where complex data or analysis is used), available before investments are taken out and for ESG performance-reports to be made available to consumers on an ongoing basis.
Further detail on all of these can be found in the Annex attached to the letter.
These principles have been constructed in order to bolster compliance to already existing regulation. Aside from a heightened level of Case Officer scrutiny, there are no material changes to the regulations for hopeful Investment Firms, yet!
It should be noted that the FCA include a link to their 2021-2022 business plan and to the Chancellor’s ‘remit’ letter, detailing their support for the Government’s net-zero economy commitments (evidenced by their appointment of Sacha Sadan to the newly created position of ESG Director) and stating plainly that these guidelines are not the end point for their expectations in the ESG space; in fact, they have been designed with future regulatory developments in mind.
So, could there be new regulations to come? Considering the current climate, it looks likely. However, the issuance of this letter gives firms a great opportunity to get ahead of the curve, ensuring a smooth transition through any regulatory changes should they arrive.
Considering applying to open an ESG fund? Want to know how potential changes to regulation could impact your firm directly? Get in touch. We are on hand to talk you through any updates to regulation no matter how complex.
Edward joined Fintech Compliance after gaining experience as a KYC contractor for a leading FinTech firm and while working as an entrepreneur in the creative arts industry. He holds a BSc in Mathematics & Philosophy from the University of Hertfordshire and is studying towards his CISI Level 6 Diploma in Investment Compliance.