ESG Supervision for Asset Management Companies
The Financial Conduct Authority (FCA) plans to carry out an ESG supervision on asset management companies. The supervision is under the charge of the Buy-Side Directorate of FCA, which includes the corporate governance content that asset management companies are most likely to have a negative impact on consumers and the market in their business activities. There are about 1000 asset management companies participating in the supervision, and they manage about 11 trillion pounds of assets for UK and global customers.
FCA believes that in the current economic environment of rising costs and fluctuating market, good corporate governance can reduce risks and achieve better returns. Based on past regulatory work, external data and the behavior of other regulatory agencies, FCA divided the governance survey into five parts, namely product governance, ESG and sustainable investing, product liquidity management, investment in operations and resilience and financial resilience.
Supervision of ESG and Sustainable Investing
FCA believes that asset management companies have added many ESG and sustainable investment financial products in their business, but there may be misleading or inaccurate information in these products. These problems may reduce the confidence of investors and also affect the actual ESG performance.
In 2021, FCA has explained to asset management companies the requirements for the design, sale and information disclosure of ESG and sustainable investment funds, and will publish the review results of some companies in these aspects.
In the first half of this year, asset management companies will conduct the first TCFD disclosure, and the FCA will also formulate policies on sustainable disclosure requirements (SDR) and investment labels (which have been publicly solicited before). These policies will be used in the supervision of the company’s ESG and sustainable investment products in the future.
In the survey, FCA will focus on whether the company fulfills relevant commitments and whether it meets corresponding requirements in ESG product development, investment decision-making and information disclosure.
FCA’s ESG Requirements for Asset Management Companies
FCA put forward corresponding ESG requirements for asset management companies in the document ” Authorized ESG & Sustainable Investment Funds: improving quality and clarity ” issued in 2021. This is the guideline for asset management companies before introducing new SDR requirements. It can be divided into the following aspects:
- Fund documents: ESG funds need to be consistent with the fund’s investment strategy in the fund name, performance promotion and fund documents. For example, “green”, “responsible investment”, “influence investment” and other names can only be used in the pursuit of sustainability investing strategies. The investment strategy needs to be disclosed in the prospectus and report of ESG fund;
- Fund investment strategy: ESG funds need to have corresponding investment experience, technology, research, data and analysis tools, and the ESG objectives formulated by the fund should be able to be reasonably achieved, and can pass due diligence and third-party certification. Asset management companies needs to track the investment results of the fund and explain the ESG performance of the fund to investors;
- Disclosure of funds: ESG funds need to briefly and clearly disclose the characteristics of funds and evidence of actions taken to achieve the established objectives. These disclosures can be measured by key performance indicators, which should conform to the sustainable characteristics of the fund’s investment strategy. If the fund pursues non-financial objectives, it also needs to disclose corresponding information for investors’ evaluation;
In the newly developed sustainable disclosure requirements and investment labels, FCA also classifies ESG funds, such as Sustainable Focus, Sustainable Improvers and Sustainable Impact. The FCA has put forward specific requirements to meet these classifications and plans to implement a new labeling system this year.