The FCA’s recent letter to chairs of authorised fund managers sets out the regulators’ expectations for ESG and sustainable investment funds. The aim is the same as the EU’s SFDR – fighting greenwashing by asset managers. The UK version is different in some ways, with the FCA opting for a ‘principles-based approach’ rather than a clear-cut classification of products and sustainability criteria.

Both initiatives are necessary and timely, but it would be wrong to expect too much from either of them for some years.

  • Regulation of financial practices is only part of the big regulatory jigsaw needed for the transition to a sustainable economy. For example, governments cannot just ask asset managers to ‘efficiently allocate capital’ while continuing to subsidise fossil fuels.
  • In any case, regulation of sustainable investments is still very much a work in progress as both the FCA and the EU’s regulator acknowledge. New regulatory guidelines will multiply over the next two to three years on both sides of the English Channel. New initiatives under discussion include an Eco-label for funds that meet sustainable criteria.

The investment industry also needs to understand that it cannot just react to regulation. Many investors and intermediaries have become deeply worried about greenwashing – concerns which the investment industry needs to better address.

We need a new distribution ecosystem to emerge – one with better links between end-clients’ values and expectations and the impact of their investments on the real world. In the meantime, the FCA’s requirements for clearer and more specific information on ESG approaches within funds should help start to close the gap.

We published our Impact of ESG on UK Fund Distribution report earlier this year. Our Impact of ESG on European Fund Distribution report will be published in Q4 2021.