The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, announced today the results of a review of the compliance of fund managers with regulatory requirements on the design and disclosure of ESG and sustainable investment funds, indicating that many firms do not yet meet expectations, and that products are often not aligned with their stated sustainability goals.

The FCA review comes ahead of the regulator’s release of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime. The SDR forms a major part of the UK’s Green Finance Strategy aimed at establishing the UK as a center for international green finance, and aligning the financial sector and capital flows with the delivery of global and domestic climate and environmental objectives.

The disclosure and labelling rules are aimed at improving transparency through common standards, and clear terminology and product classification to assist investors to navigate the rapidly growing and proliferating sustainable investment landscape, and to help reduce the risk of greenwashing.

When implemented, the rules will require asset managers to disclose how they take sustainability into account, and manage sustainability risks, opportunities and impacts, report on the sustainability attributes of the investment products and portfolios they offer. The FCA is also working to implement an investment labelling system with information on the sustainability characteristics of investment products.

The review found that fund manager have been making progress towards meeting expectations, in areas including the development and use of appropriate ESG and sustainability scoring systems and benchmarks, as well as evidence of good practice with fund managers conducting thorough due diligence on third party data providers.

Despite the progress, however, the FCA said that the review revealed that further progress is needed, with many firms still not meeting expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers. Key areas of poor practice, according to the report, included products inconsistently aligned with their ESG and sustainability goals, even if the goals were referenced in the funds’ names, fund holdings that appeared inconsistent with the fund’s ESG and sustainability objectives, key ESG information that was often not explained or included in disclosure, and the design of stewardship approaches that did not meet expectations.

Camille Blackburn, Director of Wholesale Buy-Side at the FCA, said:

“The UK’s asset management sector is world leading and we want to keep it that way. The changes we are making to the regulatory regime through upcoming rules on labelling will help retail investors and consumers understand and be confident in knowing exactly what they are investing in.”