UK: FCA ‘Dear CEO’ letter to Asset Managers sets out supervision strategy for the coming months, including ESG

On 3 February 2023, the FCA published a ‘Dear CEO’ Letter to asset managers, setting out its supervisory strategy for the coming months, and highlighting its views on the key risks posed to customers and markets. The letter makes clear that the FCA will be active in the asset management sector in the coming regulatory cycle, and reminds firms that whilst good governance is always the expectation, during this period of heightened uncertainty (with the rising cost of living, volatile markets and a challenging economic environment), it is particularly important.

It will be important for firms to consider whether any changes need to be made in order to address the harms identified in the letter by the FCA to ensure that consumers and markets are adequately protected, and firms should expect greater FCA focus on assessing the effectiveness of firms’ governance in identifying, considering and mitigating harms.

On the subject of ESG risks, the FCA highlight the risk that some claims about ESG and sustainable investing are misleading or inaccurate, which may negatively impact the integrity of the UK financial disclosure regime and is likely to harm consumers’ confidence to invest. In addition, it undermines efficient allocation of capital intended for delivery to environmental and social outcomes.

Supervisory priorities on ESG and sustainable investing

• With the growing prominence of ESG and sustainable investment products in asset managers’ business strategies, and with an eye to combatting greenwashing, the FCA is focused on testing whether firms deliver on the claims made in their communications with investors. Governing bodies should expect scrutiny on their ability to oversee and review management information about product development, ESG and sustainability integration in investment processes, 3rd party and proprietary ESG information providers, and ESG and sustainability claims made by the firm.  The FCA will particularly focus its supervisory activities on outlier firms that have been identified in previous supervisory activities or other ongoing surveillance. 
• The FCA will shortly publish a review of some firms’ ESG oversight practices - asset managers are expected to benchmark their own practices against these findings.
• With (in scope) asset managers making their first TCFD-aligned disclosure in the first half of 2023, and with the FCA aiming to publish its final decisions on the proposals in CP 22/20 later this year, the FCA will use these new sources of information and applicable rules when considering firms’ conduct in relation to ESG products.
• Firms are encouraged to outline an assessment of the extent to which net zero commitments have been considered in transition planning.

For more information on the FCA’s other supervisory priorities, see our client briefing: FCA ‘Dear CEO’ letter to Asset Managers sets out supervision strategy for the coming months.