ESG Funds Report for Asset Managers
The UK Financial Conduct Authority (FCA) releases a ESG funds report for asset managers, aiming to understand the design, delivery and disclosure of ESG funds and sustainable funds, and to formulate Sustainability Disclosure Requirements (SDR).
This ESG funds report for asset managers is based on the FCA’s investigation of twelve authorized asset managers (AFM). The FCA reviewed these companies’ ESG and sustainable investment methods, as well as the information disclosure of related ESG funds.
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Background on ESG Funds Report
In ESG funds report for asset managers, the FCA believes that asset managers have an important role in providing investment products, especially products that achieve ESG and sustainable investment objectives and financial returns. To maintain trust, investors need to be able to distinguish AFM’s disclosures and rely on these disclosures to make decisions.
The FCA has found in previous investigations that some statements about ESG and sustainable investing may be misleading, which will affect investor confidence and market integrity. AFM should consider investor expectations for ESG and sustainable products and provide products that are consistent with consumer expectations. The AFM should also convey this information in a clear and fair manner and meet market needs in terms of design, delivery and disclosure.
This investigation is also related to the FCA’s upcoming Sustainable Disclosure Requirements (SDR) and Investment Labels Rules. SDR provides anti-greenwashing rules for AFM, strengthens the consistency of sustainable disclosures, and provides guidance on fund naming, sales, classification, etc.
Design of ESG Funds and Sustainable Funds
AFM believes that the design of ESG funds and sustainable funds needs to be consistent with the investment approach, and key design elements should be disclosed in fund documents. However, in addition to financial goals, some AFMs have not set any specific ESG goals, and have not disclosed their commitments.
If a fund is formed to pursue ESG and sustainable development characteristics, it should be disclosed in the fund’s objectives and investment policies to ensure fair and clear delivery. The FCA believes that AMFs can do more at the disclosure level, such as using appropriate ESG scoring systems, integrating effective sustainable management activities into investment teams, or actively working with investee companies and documenting the results of these activities.
Delivery of ESG Funds and Sustainable Funds
In terms of the delivery of ESG funds and sustainable funds, FCA believes that the implementation of fund investment strategies should be consistent with its asset holdings and sustainable goals. The FCA investigated a number of funds holding fossil fuel assets that did not set detailed Scope 3 carbon emissions targets, but the AFM did not explain why these companies were included in some net-zero portfolios.
The FCA believes that if a fund’s holdings conflict with its sustainable investment strategy, it should provide an explanation to investors. For example, AFM can conduct asset-focused due diligence surveys and drill down into third-party data. AFM should also ensure the accuracy of data and identify and resolve errors.
Disclosure of ESG Funds and Sustainable Funds
The FCA believes that investors should receive appropriate disclosures from ESG funds and sustainable funds in order to make investment decisions. Some AFMs fail to account for key ESG characteristics of funds, such as ignoring carbon emission indicators. Although disclosure of some indicators is not currently mandatory, AFM should explain significant sustainability factors or constraints, including the necessary context and limitations of using third-party sustainability data.
The FCA recommends that AFMs disclose in detail a fund’s ESG and sustainability characteristics and how the fund continues to measure these characteristics. Methods and limitations of ESG data should be disclosed in fund documents and include necessary links for investors to view the AFM’s sustainable approach and its impact.