UK’s FCA prepares for tighter rules for ESG investment funds

Upcoming announcement expected in partnership with Treasury

The UK’s Financial Conduct Authority (FCA) is set to tighten the rules for sustainable investment funds, with an announcement expected this month on a set of principles for ESG fund labelling.

A draft document from February, seen by RI, sets out five principles containing guidance for the design, delivery and disclosure of ESG and sustainable funds.

The principles emphasise the need for accessible ESG information for consumers, with the draft saying such details should be “presented in an accessible way that is simple, concise, easy to navigate, and forms a sufficient basis in supporting consumers to make informed investment decisions”.

Funds should also report against any relevant KPIs or sustainability outcomes with “sufficient supporting information to enable end investors to interpret performance data”.

Other principles include the need for transparency over ESG data used in the investment process, with firms called upon to ensure that “data [is] fit for purpose”.

The Principles were first announced in November 2020 by the FCA’s Director of Strategy, Richard Monks, who said that they could help protect consumers from potential greenwashing. 

“Innovation can’t come at the expense of undermining trust in the sustainable finance market”, he said. “Trust is hard won but easily lost… We will act where we find firms are not upholding the standards we expect”.

Separately, the UK Treasury announced last week that it would be working with the FCA to develop a ‘sustainable investment label’. It said that the label would be a “quality stamp”, which would allow consumers to “clearly compare the impacts and sustainability of their investments for the first time”.

Daniel Nevzat, Senior Government Relations Manager at Norton Rose Fulbright, said that he expects the proposed label to be well received.

“There are big problems in the market around the consistency of labelling of different products. There’s a lot of flaws, a lot of confusion amongst consumers and even more sophisticated investors, so I think it’s something that will probably be welcomed”. 

The Treasury did not say whether the new label would be compulsory for funds labelling themselves as green, or a voluntary ‘gold standard’ like the French SRI label, but Nevzat said that it might not make much difference.

“When voluntary standards are set, they can become the market standard, so institutional investors may demand that funds are labelled in line with this new standard,” he said.

“Even if the FCA and UK Government were to introduce some kind of standards that were voluntary in nature, there would likely be quite a high take-up, depending on how stringent the requirements are”. 

Last week, the country’s Pensions and Lifetime Savings Association launched a consultation on a new Responsible Investment Quality Mark for pension funds. It said that the mark would allow savers to see that funds were performing well against ESG standards “without having to wade through scheme literature in search of the relevant report or regulatory disclosure”.