Despite most Authorised Fund Managers (AFMs) having taken steps to comply with the FCA’s expectations for ESG and sustainable funds, there is still significant room for improvement, according to a review.
Ahead of the rollout of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels, the FCA’s latest review has revealed a need for many firms to improve disclosures and ensure greater transparency for retail investors.
The SDR aims to ensure that asset managers and fund managers provide investors with clear and consistent information about the sustainability credentials of financial products, enabling them to make informed investment decisions.
This initiative stems from calls for legislation, following the discovery that some firms were misrepresenting their funds to investors and overstating their adherence to sustainability criteria, a practice known as greenwashing.
The FCA review found evidence of good practice, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks. The review also highlighted good practice where AFMs conducted thorough due diligence on third-party data providers.
However, the review also found that some fund managers were not always adhering to the SDR, and that there were inconsistencies between the ESG goals stated in a product’s name and its actual holdings. In some cases, managers were also unable to adequately explain how certain investments aligned with their stated sustainability objectives.
Shortcomings were also found in the stewardship practices of some fund managers. Stewardship refers to the way fund managers engage with the companies they invest in to promote responsible business practices, manage material ESG risks, and create value for clients.
Some managers were not clearly defining the objectives of their stewardship activities or measuring progress against those objectives. The report found that it was often “difficult” to identify the exact aim of these activities and how they were aligned to fund objectives.
“The FCA’s review highlights the need for firms to increase the transparency of their investments and improve their reporting systems to keep up with the fast-approaching ESG regulation,” said Yann Bloch, vice president for the Americas at global financial software firm NeoXam.
“Investing in these areas will ensure that firms are providing regulators and clients with information they can trust, which in turn will inspire confidence in funds that apply an ESG focused investing strategy.”
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