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Dear AFM chair | Release Date: 19th July 2021

To read a shorter summary of this Dear AFM chair letter, click here.

To access the original FCA document, click here.

Long Summary

This comprehensive communication from the Financial Conduct Authority (FCA) is directed to the Chairperson of Authorised Fund Managers (AFMs). It specifically addresses the burgeoning sector of Environment, Social, and Governance (ESG) and sustainable investment funds. Highlighting the significant role these funds play in promoting environmental sustainability and social responsibility, the FCA emphasises the necessity for clear, accurate, and substantiated descriptions of their investment strategies and objectives.

The Growing Importance of ESG Funds

The letter starts by acknowledging the rapid growth of ESG and sustainable investment funds, driven by increasing investor interest in initiatives that prioritise environmental and social benefits. These funds are not only pivotal in steering capital towards sustainable ventures but are also essential for addressing global challenges such as climate change and social inequity.

Regulatory Observations and Expectations

Concerns Over Fund Applications

The FCA expresses concerns regarding the quality of applications for the authorization of ESG funds, noting a trend of applications that are often poorly drafted and include claims that lack substantiation. Such deficiencies could potentially mislead investors and compromise the integrity of the market, underscoring the need for more rigorous regulatory oversight.

Demand for Transparency and Accuracy

The regulator mandates that funds marketed with a focus on sustainability must articulate their investment strategies clearly. Furthermore, any claims regarding their sustainability goals must be robustly supported by factual evidence to prevent investor deception.

Enhancing Fund Authorization and Oversight Practices

Increased Scrutiny and Evaluation

In response to the identified issues, the FCA intends to intensify its scrutiny of new fund applications. This enhanced review process aims to ensure that funds comply with regulatory standards, particularly in terms of the authenticity of ESG claims and the practicality of their investment strategies.

Introduction of Guiding Principles

To aid fund managers in navigating the regulatory landscape, the FCA has introduced a set of guiding principles. These principles delineate the regulatory expectations for the design, delivery, and disclosure of responsible investment funds, ensuring that fund disclosures accurately reflect their strategies and sustainability claims.

Operational Expectations and Regulatory Framework

Integrity in Investment Strategies

Fund managers are expected to maintain transparency in their operations and ensure that their strategies are consistently aligned with the descriptions provided to investors. This includes accurately reflecting the fund’s focus on ESG principles in all aspects of its operation and communications.

Management and Reporting of ESG Claims

Funds making ESG claims must establish clear metrics and reporting practices. These practices should accurately reflect the funds’ performance and adherence to their stated objectives, thus providing investors with reliable information to gauge the fund’s true impact.

Collaborative Efforts and Future Directions

Encouragement for Feedback and Regulatory Participation

The FCA encourages fund managers to actively participate in the process of refining these guidelines. It aims to ensure that the implementation of these standards is effective and reflective of industry needs.

Plans for Comprehensive Regulatory Review

The FCA outlines its plan to undertake a holistic review of the personal insolvency framework, which will include a focus on incorporating robust ESG criteria into fund management practices. This review is expected to lead to enhanced regulatory frameworks that support the sustainable investment agenda.

Conclusion and Actionable Recommendations

Urgency in Compliance and Transparency

Fund managers are urged to rigorously assess their adherence to the new guidelines and be prepared to demonstrate this compliance in their interactions with the FCA.

Proactive Engagement in Regulatory Processes

Managers are encouraged to engage deeply with the regulatory processes, adhere to the evolving standards, and maintain best practices in fund management to ensure their operations are transparent and their contributions to sustainability are genuine and impactful.

This letter marks a significant step by the FCA towards strengthening the regulatory framework for ESG and sustainable investment funds. It aims to enhance market integrity and protect investor interests while encouraging the industry to support global sustainability goals effectively.

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