The UK’s City watchdog is poised to swoop on asset managers if they promote “misleading” sustainable investments, as it prepares to ramp up its scrutiny of the ‘environmental, social and governance’ (ESG) label.
In a ‘Dear CEO’ letter to the alternative asset management industry today, the Financial Conduct Authority said it was crucial that investors had confidence in the veracity of ESG products and it would review firms to ensure products were up to scratch.
“Firms should ensure that documentation of such products are clear, not misleading and that firms’ actions match the stated claims,” Nike Trost, Head of Asset Management and Pensions Policy at the FCA said.
“Firms offering such products should expect to be subject to review to ensure marketing materials accurately describe their product, with funds offering clear and consistent disclosure,” she added.
The warning comes after the watchdog in December rolled out rules requiring asset managers and alternative investment fund managers to disclose climate information in line with those recommended by the Taskforce on Climate-related Financial Disclosures (TCFD).
Under current rules, only the largest managers are required to report in line with TCFD rules, but firms with funds under £5bn will fall in scope of the rules from 2023.
The watchdog has recently also backed plans to bring scrutiny of ESG ratings and data within its remit, saying in June there was “a clear rationale for regulatory oversight of certain ESG data and rating providers”.
In its letter today, the watchdog pledged to increase its scrutiny of the sector more broadly as it grapples with the changes of covid, Brexit and the cessation of Libor last year.
The FCA said it would now be issuing a questionnaire asking firms for information about their business model, products, investor categorisations and associated control framework.
“We will follow up with those firms exhibiting characteristics that increase the potential of consumer harm,” Trost said today.
“As part of this supervisory work, you will need to evidence the reasonable steps taken to ensure your firm’s target market is both appropriately defined and not exposed to an unsuitable level of risk.”