FCA to crack down on ESG mislabelling, conflicts of interests in alternatives sector

RI earlier reported that the regulator had asked asset managers to rewrite their ESG fund details over greenwashing concerns.

The UK’s Financial Conduct Authority has warned that it will scrutinise ESG claims made by hedge funds and private equity firms as part of its annual supervisory priorities.

In a letter sent to alternative fund managers yesterday, the FCA said: “Firms offering [ESG] products should expect to be subject to review to ensure marketing materials accurately describe their product, with funds offering clear and consistent disclosure.

“The FCA continues to assess authorised fund applications with an ESG or sustainability focus and firms should note that ESG remains a priority area in the asset management department.”

The financial regulator noted an increase in the number of ESG-themed alternative investment funds being brought to market and asked managers to ensure that “documentation of such products are clear, not misleading and that firms’ actions match the stated claims”.

The warning appears to be the first time that the regulator has publicly raised the topic of ESG greenwashing directly with supervised entities following the introduction of greenwashing KPIs in its three-year strategy published earlier this year. The FCA issued a set of guiding principles for ESG investment funds in 2021.

In July, Responsible Investor exclusively reported that the regulator had privately asked a number of firms to alter ESG-related fund and website disclosures over greenwashing concerns. The FCA has also backed the regulation of the ESG data sector and has indicated that it will engage with the Treasury on introducing legislation to this effect.

The latest notice was made in a “Dear CEO” letter, which is used by the FCA to communicate expectations to authorised firms within each of its supervisory portfolios. The FCA is yet to publish a Dear CEO letter for the broader asset management sector in 2022.

The regulator also said that it had observed firms bypassing their own processes to increase assets under management and situations where “dominant shareholders make material decisions independent of the firms’ governance structure”. Such conflicts of interest will be met by enforcement action where necessary, it added.

Finally, hedge funds and PE firms were told to consider steps to “provide an environment where diverse talent can flourish” as part of the FCA’s comments on corporate culture. The influence of senior managers and firm policies on culture is set to be a priority under the forthcoming supervisory cycle, with “evidence of staff being unable to speak up an area of particular concern”.

The FCA said it would publish a consultation paper on diversity and inclusion later this year and expected “boards to fully consider this aspect of their organisation”.