FCA publishes anti-greenwash principles for UK funds

Guiding Principles

Further guidance / expectations

Principle 1 

The design of responsible or sustainable investment funds, and disclosure of key design elements in fund documentation, should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or investment policy and strategy of the fund.

• Fund names must not be misleading:
  • terms such as "ESG2, "green", "sustainable", "responsible", "ethical", "impact", or related terms should not be used unless the fund pursues ESG/sustainability outcomes in a way that is substantive and material (compared to a fund that does not take such considerations into account);
  • for example, an index-tracking fund that excludes a small number of securities, or where the holdings are not materially different from a similar non-ESG index should not use these terms in its name;
  • “impact” or “impact investing” should only be used in the fund name if the fund is seeking a non-financial (real world) impact, and if that impact is being measured and monitored.

• Investment objectives / policy: where a fund claims to pursue ESG characteristics, themes or outcomes, these should be appropriately reflected in its objectives and/or policy, with specific and clear disclosures:
  • funds that aim to generate a measurable, beneficial ESG/sustainability impact alongside a financial return should clearly state the intended ‘real-world’ outcome;
  • where third-party data providers or indices are exclusively or largely relied on to meet the ESG aims, this should be disclosed in the prospectus;
  • where a fund might hold securities that an investor might not expect, given the ESG/sustainability focus of the fund, this should be made clear in the prospectus, including the circumstances and the purposes for which these securities would be held.

• Investment strategy:
  • key elements of the ESG strategy should be disclosed – e.g. the investible universe, any screening criteria (positive or negative), specific E, S or G characteristics/themes or ‘real world’ (non-financial) impacts pursued, application of benchmarks/indices, and the stewardship approach of the fund;
  • where a fund just integrates ESG into the investment process, and there is no material ESG orientation in the fund design/strategy – there shouldn’t be any prominent ESG claims in the fund’s name or documentation and ESG shouldn't be positioned as a key part of that fund’s offering; and
  • the disclosures should give sufficient information to enable investors to understand and compare the ESG strategy pursued by the fund (e.g. negative screens, ESG tilts or positive impact objectives).

• Stewardship approach: where stewardship is part of the active investment strategy of the fund, it should be clear how monitoring, engagement and voting activity in respect of ESG/sustainability matters are integrated with investment decisions, and how escalation and divestment decisions are made.

Principle 2 

The delivery of ESG commitments / aims should be supported by appropriate resources, the fund’s investment strategy should be implemented consistently with stated ESG objectives and should be monitored.

• Resources: appropriate resources must be in place and deployed to support the delivery of the fund’s ESG aims – including in relation to skills (e.g. investment professionals), experience, technology, research, data and analytical tools.

• Oversight and due diligence of data inputs: appropriate resources should be in place to oversee internal and third-party research/tools and firms are expected to consider whether they should due diligence data providers. Appropriate steps should be taken to monitor, assure and understand quality of data, data inputs and any gaps.

• Holdings and the reasonable investor test: AFMs should consider whether a reasonable investor would consider that the fund’s holdings reflect the ESG commitments/promises made by the fund. Where holdings might appear contradictory to an ESG investment strategy, the AFM should consider explaining this apparent inconsistency to end investors.

Principle 3 

Pre-contractual and ongoing periodic disclosures should be easily available to consumers, be clear, succinct and comprehensive and contain information that helps consumers make investment decisions.

• Easy availability: AFMs should take appropriate steps to ensure consumers can access relevant ESG/sustainability-related information to support their investment decisions and monitor outcomes (including information on third-party data tools, their methodologies and limitations) – including, to the extent possible, where a fund is marketed via a distribution platform.

• Pre-contractual disclosures: similar to the EU SFDR rules, these should be included in relevant regulatory documents and reflected in accompanying marketing materials in a clear, fair and not misleading way. The information should be presented in an accessible way that is clear, succinct and comprehensible, and that forms a sufficient basis to support consumers in making informed investment decisions.

• Ongoing performance reporting: AFMs should take appropriate steps to make information on how well a fund is meeting its stated ESG objectives/aims available to consumers on an ongoing basis (for example in annual and half-yearly reports). This should include (as appropriate) reporting on KPIs, non-financial (real world) outcomes and actions taken in that regard and on stewardship efforts.