The UK’s financial watchdog has said that further improvement is needed by fund managers to comply with its principles on the design, delivery and disclosure of their ESG and sustainable funds.

A review by the Financial Conduct Authority (FCA) found that while most authorised fund managers have made efforts to comply with its expectations, many firms still have further to go, particularly around the disclosure and clarity of information being given to retail investors and consumers.

The move comes after the regulator issued a Dear Chair letter in 2021 to authorised fund managers which set out a series of guiding principles for sustainable investment products.

The FCA's recent assessment revealed that since then, some products have been inconsistently aligned with their ESG and sustainability goals, even if they referenced them in their name.

In other cases, fund holdings have been inconsistent with their ESG or sustainability objectives, with some fund managers unable to explain how these investments fit in with their goals.

The authority said that key ESG and sustainability information is often not being explained or put into context, which means relevant information is sometimes not immediately or clearly accessible to investors.

It also warned that the design of authorised fund managers’ stewardship approaches have not met expectations because often it is difficult to identify the exact aim of their activities and how these are aligned to fund objectives.

The FCA is publishing its review on ESG and sustainable funds ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime. The organisation expects firms to address the good and poor practices outlined in the report to meet the requirements of SDR and the recently launched Consumer Duty.

"The changes we are making to the regulatory regime through upcoming rules on labelling will help retail investors and consumers understand and be confident in knowing exactly what they are investing in," said Camille Blackburn, director of wholesale buy-side, FCA. “Embedding the Guiding Principles and the good practice we have identified in our review will help firms to comply with proposed new requirements under the SDR and investment labels rules, alongside their Consumer Duty obligations."

She added: “We expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.”

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