While most fund managers have made efforts to comply with the regulator’s expectations on the design, delivery and disclosure of their ESG and sustainable funds, more improvements are needed, the FCA says.

An FCA review found evidence of good practice on the development and use of appropriate ESG and sustainability scoring systems and benchmarks.

It also highlighted good practice where managers conducted thorough due diligence on third party data providers. 

However, the regulator found several examples of poor practice, particularly around the disclosure and clarity of information given to retail investors and consumers.

Key ESG and sustainability information was often not explained, put into context or included in disclosures. The result was relevant information was not immediately or clearly accessible to investors.

Products were also inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name.

In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives and some fund manager were not able to explain how these investments fitted with their goals. 

The design of fund managers’ stewardship approaches also did not meet the FCA’s expectations.

The regulator said it was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives and examples of the progress they made against those aims.

The regulator said it expects firms to address the good and poor practices outlined in its report to comply with the Consumer Duty.

The FCA published its review today ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels.

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. 

“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.”