On 19 July, the UK's Financial Conduct Authority (FCA) published a letter to the chairs of UK authorised fund managers (“AFMs”), setting out its long-awaited expectations and principles regarding greenwashing in the context of UK authorised funds.
The principles build on existing FCA rules that apply to AFMs (in particular the obligations to make fair, clear and not misleading communications) and are intended to be complementary to the EU’s Sustainable Finance Disclosure Regulation (SFDR) requirements.
The letter also foreshadows further UK reforms in this space: “…the guiding principles are not the end point of setting out our expectations in this space, and they have been developed with the aim of being compatible with prospective future [UK] disclosure rules for responsible and sustainable investment fund products”.
The principles are presented as “guiding” principles, but do prescribe strict requirements in certain areas (e.g. fund names) and are quite similar to the AMF’s French doctrine for significantly engaging funds (albeit the UK reforms are a lot less prescriptive overall).
The principles also echo the overall SFDR framework as AFMs are expected to:
(i) have clear and accessible pre-contractual ESG disclosures;
(ii) report on the attainment of ESG objectives and characteristics; and
(iii) ensure that product marketing / labelling is proportionate to the materiality of ESG considerations in the management of the fund.
Overall, the principles indicate that there will be much greater FCA scrutiny of UK authorised funds making ESG-related claims, both in the pre- and post-authorisation phases. The FCA has also given practical examples in the letter of funds that fell below its expectations on this topic. In the FCA’s view, applications for the authorisation of ESG-focused funds “often contain claims that do not bear scrutiny…we expect to see material improvements in future applications”.
The FCA letter also suggests an overall policy direction that aims to match the green ambitions of the EU (although using a more principles-based framework for now).
What products do the principles apply to?
The principles are expressed as applying to FCA authorised UK funds only, and so do not apply to unauthorised UK AIFs or overseas funds that are marketed into the UK (including those that are marketed under the FCA’s temporary marketing permissions regime).
Although there is no specific commentary to this effect, in practice the principles may become best practice for all funds / fund managers to consider (noting that they build on certain FCA rules, such as the fair, clear and not misleading rule, that apply to a much broader population of funds and fund managers than UK AFMs and authorised funds) and are likely to form the basis of the FCA’s version of the SFDR in due course.
No implementation date is specified and so the principles take effect from publication (i.e. as of 19 July 2021).
The guiding principles are underpinned by an overarching FCA principle that:
“A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure. A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy, and its holdings.”
This overarching principle is supplemented by 3 supporting principles: (i) design; (ii) delivery; and (iii) disclosure - with further guidance provided on each supporting principle. See table below for more details.
Further guidance / expectations
The design of responsible or sustainable investment funds, and disclosure of key design elements in fund documentation, should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or investment policy and strategy of the fund.
The delivery of ESG commitments / aims should be supported by appropriate resources, the fund’s investment strategy should be implemented consistently with stated ESG objectives and should be monitored.
Pre-contractual and ongoing periodic disclosures should be easily available to consumers, be clear, succinct and comprehensive and contain information that helps consumers make investment decisions.