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Home » Resources » Sustainable investment fund applications fall below expectations for FCA

January 6, 2022

Estimated reading time: 4 minutes

Sustainable investment fund applications fall below expectations for FCA


The Financial Conduct Authority (FCA) has issued a Dear Chair letter noting that it is seeing applications for sustainable investment funds that are “poor quality and fall below expectations”.

The UK regulator has said that while environmental, social and governance (ESG) and sustainable funds are “currently the fastest growing segment of the European funds market”, the applications from funds purporting to be sustainable or ESG-related “often contain claims that do not bear scrutiny”.  

Within the letter, the FCA is quick to note the importance of a “well-functioning ESG and sustainable investment market”, given the contribution it could have in the “allocation of capital in pursuit of a net zero economy”.

In essence, the regulator is highlighting that while it is seeing a high volume of applications for authorization of funds with a sustainable focus, these applications are simply not good enough – or often offer a thinly veiled commitment to ESG, which doesn’t hold much weight. With that in mind, it has set out expectations that any funds marketed with a sustainability and ESG focus can substantiate the assertions that they’re making.

The FCA’s guiding principles for sustainable investment funds

Given the emergence of inadequate fund applications, the FCA has set out guiding principles to ensure that ESG-related claims are substantiated, clear and not misleading – both at the time of application and into the future.

The principles, which comprise an overarching principle and three supporting principles, have been developed with input from stakeholders and consumer research and apply to funds that make specific ESG-related claims. The principles are not targeted at those that integrate ESG considerations into their everyday investment processes, though I suppose there would be no harm in understanding and applying these principles wherever ESG is involved.

Overarching principle of consistency in sustainable investment funds

The overarching principle that should always be considered is that any ESG or sustainability focus within an investment fund should be consistently reflected across its design, delivery, and disclosure. This extends to mean that themes of ESG and sustainability should be consistently reflected in a fund’s name, objectives, investment policy and strategy and its holdings.

Principle 1. Design

Responsible and sustainable investment funds should consider such themes across their design and disclose this in fund documentation. Any reference to ESG or related terms in a fund’s name, promotional material or documentation should “fairly” reflect the ESG considerations of the objectives and/or investment policy and strategy of the fund.

Principle 2. Delivery

The resources (including skills, experience, technology, research, data and analytical tools) that a firm applies in pursuit of a fund’s ESG objectives should be appropriate and in line with the overarching goal of ESG. The way that a fund’s ESG investment strategy is implemented, and the profile of its holdings, should be consistent with its disclosed objectives on an ongoing basis.

Principle 3. Disclosures

Funds should provide easily available pre-contractual and ongoing disclosures about sustainable investments to their consumers. These should contain information that allows them to make investment decisions about ESG and sustainability-related information, which should be made readily available in a key investor information document. Information about such measures should be clear, succinct and avoid using jargon where everyday words could be used instead.

Funds should disclose sufficient information so that consumers can make an informed decision about the merits of investing in the fund. Periodic fund disclosures should include and assessment of ESG characteristics, themes, or outcomes as well as evidence of actions taken in pursuit of the fund’s stated aims.

CUBE comment

The increased awareness and dialog around ESG investments has been primarily driven by a shift in traditional investor personas. Over the last few years, we have seen a wave of new, socially conscious (often millennial) investors who want to know that their investment returns aren’t rooted in unsustainable or unethical investment vehicles.

Investment firms are clearly aware of this shifting demographic, and eager to cash in on the new-wave of “sustainable” funds. As the Dear CEO letter would suggest, firms are rushing to ride out the ESG wave by labeling their funds as sustainable and hurrying to push them through the FCA authorization process. However, as is becoming increasingly clear, saying that a fund is sustainable is very different from actually creating sustainable investment funds… this hasn’t gone unnoticed by the UK regulator.

I’m thrilled to see that the FCA is picking up on this activity so early on and is proactively looking to tackle the issue in its ESG regulatory requirements. It’s a bold move from the regulator and one that aligns neatly with the recent commitment from the FCA’s Chief Executive, Nikhil Rathi, to be a “more assertive FCA” that acts “decisively”.

Sustainable funds should do what they say on the tin – they should be sustainable and actively look to promote ESG across financial services and beyond. Such funds hold huge potential to make genuine, meaningful impact on climate change. But such funds need to be done properly, not on a whim or for the sake of making a quick profit. Sustainable investment done badly could be more damaging than not doing it at all.


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