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| 7 minutes read

UK: FCA finds that AFMs still have further to go to fully embed ‘Guiding Principles’ for ESG and sustainable investment funds

A review by the FCA has found that while most Authorised Fund Managers (AFMs) have made efforts to comply with the FCA’s expectations on the design, delivery, and disclosure of their ESG and sustainable funds, “further improvement is needed”. 

The latest review is a follow up to the FCA’s July 2021, Dear Chair Letter in which the FCA provided a set of guiding principles, and set out its expectations in this area – the review assesses how AFMs have implemented the Guiding Principles.  It also comes against the backdrop of the FCA’s Asset Management Portfolio letter of February 2023 (see our earlier blog post) which highlighted the increase in the prominence of products which have ESG and sustainable investment characteristics within Asset Managers’ business strategies (and the risks to consumer confidence and market integrity of misleading or inaccurate claims about ESG and sustainable investing).   This review indicates a hard-line approach by the FCA – particularly given the FCA’s focus not just on disclosures and marketing materials, but also on fund portfolio holdings, and their correlation to the fund’s ESG or sustainability commitments.  There is a clear focus on AFMs substantiating, or evidencing their claims. 

The FCA has chosen to publish this review and set out their expectations ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime (which it says it expects to publish “shortly”) - embedding the Guiding Principles and the good practice the FCA have identified in its review, the FCA says, will help firms to comply with the upcoming SDR and Investment Labels rules. Unsurprisingly the FCA expects firms to have in mind the Consumer Duty principles and outcomes as they work to meet these expectations.      

Key Findings


  • Where there are references to ESG or sustainability in a fund name, this should be appropriately reflected in the fund’s objectives and/or policy. Although ESG and sustainability outcomes are typically reflected (in varying degrees of detail) in the investment policy and/or strategy, the FCA has found instances of no explicit ESG or sustainability objective, or objectives inconsistently aligned with the stated investment policy. In other cases the FCA has identified fund documentation (e.g. the prospectus) explicitly setting out a wide range of ESG and sustainable outcomes, but only committed to achieving at least one of those outcomes.
    • Examples of good practice include developing and/or using appropriate ESG and sustainability scoring systems or using benchmarks that are suited to the AFM’s funds, with firms also demonstrating an understanding of their underlying methodologies and limitations, including of relevant third-party methodologies.
  • Firms can do more in their fund and firm level disclosures to explain their stewardship approach (this includes how their approach enables them to deliver on a fund’s objectives, how they measure delivery of stewardship outcomes and any associated challenges).  The FCA has found that the design of AFMs’ stewardship approaches generally does not meet FCA expectations. It is often difficult to identify the nature of stewardship activities from fund literature alone and identify clear examples of progress arising from engagement with investee companies. Firm-level documents are also sometimes not accessible from, or cross-referenced to, fund-level documents, and the FCA also identified challenges in identifying how firm-wide stewardship activities relate to fund-level objectives during its meetings and in disclosures to investors. 
    • Examples of good practice include:
      • Embedding stewardship activity within investment teams, providing investment managers with ownership of engagement activity with the support of a central stewardship resource
      • AFMs having active engagement policies and initiatives with investee companies to further their ESG and sustainability approach. Firms using voting as a means of influencing investee companies to pursue ESG and sustainability objectives.
      • AFMs making efforts to measure and record the outcomes of their stewardship activity with investee companies and how this furthers the ESG and sustainability objectives of their fund range.


  • The need for consistency between fund holdings and a fund’s ESG or sustainability objectives.  In some instances, the FCA has found fund holdings appearing to be inconsistent with a fund’s ESG or sustainability objectives and some AFMs unable to explain the consistency of these holdings to the FCA – the Guiding Principles state that where holdings might appear contradictory to a fund’s ESG or sustainability investment strategy, the AFM should consider explaining this to investors.  This also ties into the requirements in the COBS rules for fund communications and financial promotions to be fair, clear and not misleading.  The FCA directs that firms should have a credible, defined and documented approach to the treatment of these holdings in their investment frameworks. Where applicable, AFMs should also consider the customer understanding outcome within the Consumer Duty and how their disclosures align with this.
    • Examples of good practice include:
      • A strong focus on investment research and due diligence for asset selection that is embedded in the AFM’s investment processes
      • Due diligence carried out on third party data providers whose inputs are used to inform the AFM’s external disclosures and reporting around delivery
      • The maintenance of appropriate systems and controls to ensure data accuracy and compliance with underlying methodologies, as well as identifying and addressing any errors by third party data providers and assessing the ongoing appropriateness of ESG data for the delivery of the fund


  • Key ESG and sustainability information should be explained and put into context in disclosures.  In some instances the FCA has identified a failure to explain information about the key ESG and sustainability-related features of their funds (for example, (i) some AFMs choosing to disclose carbon footprint data and carbon emissions metrics but omitting to explain that they excluded Scope 3 emissions, even though these are often the majority of a fund’s carbon footprint; (ii) some examples of ongoing reporting on carbon emissions metrics show the emissions of ESG and sustainable investment funds were higher than non-ESG or sustainable funds, without any explanation given).  The FCA reminds AFMs that they should explain any material data considerations or limitations in fund disclosures and include the necessary contextual information about the use of third-party ESG and sustainability methodologies. 
    • Examples of good practice include:
      • Clear disclosures on the ESG and sustainability features of a fund, what it is designed to offer and how performance is measured on an ongoing basis.
      • When explaining the use of benchmarks in consumer facing communications, making clear the methodology, limitations and ESG data, including for ESG benchmarks.
      • testing how information about the fund’s ESG and sustainability features are understood by investors, and gathering data about investors’ use of ESG and sustainability information on their website to inform ongoing disclosures.
  • AFMs should review and consider how they can improve and reconcile fund and firm-level disclosures to ensure they are appropriately aligned and provide a clear indication of the ESG and sustainability goals the product aims to achieve.  The FCA has found it to be common for the fund prospectus to have little detail on ESG and sustainability policy goals with investors instead referred to firm-level policies that gave greater detail.  However, often the contribution of an individual fund to firm-wide ESG and sustainability goals is not disclosed and, therefore, the nature and extent of ESG and sustainability outcomes a fund aimed to deliver is unclear and Individual funds often vary in their alignment to the firm-wide ESG or sustainability policy, even when the firm policy is described as a minimum standard. 
  • A need for clear presentation and accessibility of key ESG and sustainability information.  The FCA also sees room for improvement in the way that documents, and cross-references in documents, link together in a clear and coherent way to ensure better investor understanding.  Issues identified as part of the review include (i) including further ESG and sustainability-related information in supplementary reports that are not displayed as prominently as the factsheet; (ii) a difficulty in navigating documents because information is not where one would expect it to be, or because it is necessary to cross-reference between several documents to obtain it; or (iii) not provide any ongoing non-financial reporting or way of tracking the sustainability performance of their funds, can make it challenging for investors to understand key features of the fund and its ESG or sustainability related performance.   The FCA therefore directs AFMs to review the quality and accuracy of cross-references in their disclosures and consider whether they are accessible for investors and presented in a clear, succinct and comprehensible way, in line with the Guiding Principles.


  • The need for AFMs to refine existing oversight and control structures.  Governance arrangements have evolved over time to adapt to ESG and sustainability regulation – however, issues exist (particularly where older funds have been adjusted to incorporate ESG and sustainable objectives - governance records and management information is often lacking - making evidencing key decisions, the rationale for those decisions and challenge required by our principles and rules, more difficult).  Firms are reminded of the importance of effective oversight to appropriately manage risks of harm from practices that are inconsistent with existing regulatory requirements and the Guiding Principles, particularly in light of the Consumer Duty. 
    • Examples of good practice include
      • A strong product governance structure around the AFM’s ESG and sustainable investment fund range, with risks relating to ESG identified, monitored and reported through the governance structure.
      • Monitoring of ongoing adherence to the fund investment objective and policy, with exceptions reported to the relevant committee and overseen by the Board.
      • Monitoring within the product governance structure of management information relating to ESG and sustainability objectives and aims
      • Embedded investment policies and processes for ESG and sustainable investment funds, with relevant staff aware of them and involved in their delivery.

Next Steps

The FCA expects AFMs to assess how they are meeting the rules and guidance in relation to ESG and sustainable investment funds in light of the good and poor practices outlined in the review - this is also seen as a useful exercise to prepare for the proposed SDR and investment labels regime. Likewise, in light of the Consumer Duty, AFMs should identify and address any shortcomings in the design, delivery and disclosure of their funds, and ensure they are not conducting their operations in a way that causes harm to consumers.


You can find the FCA’s review here
The related press release can be found here

Embedding the Guiding Principles and the good practice we have identified in our review will help firms to comply with proposed new requirements under the SDR and Investment Labels Rules, alongside their Consumer Duty obligations. We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.


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