FCA lambasts ‘poor quality’ ESG product design

UK watchdog outlines guidance to improve sector credibility as asset managers rush to launch new products

July 23, 2021

The UK’s Financial Conduct Authority (FCA) has hit out at “poor quality” product applications for ESG funds and set out detailed guidance for fund managers.

Asset managers have been rushing to launch new funds as demand for ESG-themed strategies skyrockets. However, the watchdog said many of the applications it had received had fallen “below our standards”. This trend has been exacerbated by the recent timeline published by the FCA signaling mandatory TCFD alignment to be gradually rolled out across much of the financial services sector.

In a letter to the chairmen of authorised fund managers, published on 19 July, Nick Miller, head of the FCA’s asset management supervision department, said that applications for ESG funds must improve.

Miller said that several ESG fund applications his team had reviewed were “poorly drafted” and “often contain claims that do not bear scrutiny”.

The FCA letter acknowledged the rate of innovation within the sustainable investment sector, although Miller said the “rapid pace of change presents the industry with challenges”.

“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,” he said.

The letter cited examples including a passive fund with an ESG-related name but that did not track an ESG-themed index, a fund claiming a “positive environmental impact” that had no way of measuring such impact, and several instances of funds whose holdings did not match their strategy descriptions.

The nine-page letter also outlined newly produced guiding principles, created by the FCA to be in line with prospective future disclosure rules. These described the ESG requirements necessary at pre- and post-authorisation stages.

The first guideline category describes the fund’s documentation, including advice on ensuring that the fund’s name fairly reflects its strategy. The second category outlines the fund’s delivery, ensuring that appropriate skills, technology, resources, and tools are to be used.

The final category relates to the information and disclosures available to potential consumers. It encourages fund managers to avoid jargon and technical terms.

Miller said that such guidance was necessary to ensure that poor products do not “undermine trust and deter consumers from this segment of the market”, which could subsequently result in a “lack of effective competition between the firms providing ESG or sustainable investment funds.”

The UK government recently created a working group to develop a regulatory green taxonomy for ESG products. The Green Technical Advisory Group (GTAG) comprises business and environmental experts and will oversee the development of the framework.