In a letter to the chairs of authorized fund managers, the Financial Conduct Authority (FCA) has set out expectations on the design, delivery, and disclosure of environmental, social, and governance (ESG) and sustainable investment funds. To reinforce its expectations, FCA developed a set of guiding principles to ensure that any ESG-related claims are clear and not misleading, both at the time of application and on an ongoing basis, to enable consumers to make informed choices. The guiding principles comprise an overarching principle on consistency and three supporting principles that focus on design, delivery, and disclosure. Each principle is accompanied by a set of "key considerations," which add clarity.
The overarching principle states that a fund’s ESG or sustainability focus should be reflected consistently in its design, delivery, and disclosure. The focus on ESG or sustainability should be reflected consistently in the name, the stated objectives, the documented investment policy and strategy, and the holdings. FCA expects authorized investment funds pursuing a responsible or sustainable investment strategy and those that claim to pursue ESG or sustainability characteristics, themes, or outcomes to consider the overarching principle, supporting principles, and key considerations. The other principles include:
- 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 or sustainability-related information in a key investor information document should be easily available, clear, succinct, and comprehensible, avoiding the use of jargon and technical terms. Funds should disclose information to enable consumers to make an informed judgment about the merits of investing. Periodic fund disclosures should include evaluation against stated ESG or sustainability characteristics, themes, or outcomes as well as the evidence of actions taken in pursuit of the fund’s stated aims.
The guiding principles are relevant where an FCA authorized investment fund pursues a responsible or sustainable investment strategy and claims to pursue sustainability characteristics, themes, or outcomes. These principles are targeted at funds that make specific ESG-related claims, not those that integrate ESG considerations into mainstream investment processes. The guiding principles complement the recent FCA proposals to implement climate-related disclosure rules for asset managers, life insurers, and FCA-regulated pension schemes. The guiding principles have been developed with reference to the existing statutory requirements and the existing Handbook rules and guidance.
Keywords: Europe, UK, Securities, ESG, Sustainable Investment Funds, Climate Change Risk, Sustainable Finance, Guiding Principles, FCA
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