The FCA has specifically warned asset management firms against greenwashing in its latest "Dear CEO" letter (dated 3 February 2023). The letter sets out that the FCA is aware of an increase in the prominence of ESG and sustainable investment products being offered by asset managers. The FCA highlights the risk that some claims about ESG and sustainable investing are "misleading or inaccurate", which may go on to negatively impact the integrity of imminent sustainability disclosure regimes. In turn this may harm consumers' confidence to invest in ESG products and undermine efficient allocation of capital for environmental and social outcomes. The FCA's concerns in the letter mirror those set out in its consultation on Sustainability Disclosure Requirements (CP 22/20), so asset managers will no doubt already be aware of these.
The point of the letter is to outline potential harms to consumers or markets that the FCA thinks may arise within asset management firms. ESG is one of the key topics (among others) with the omnipresent Consumer Duty of course being front and centre.
In terms of what the FCA expects firms to do when it comes to ESG and sustainability, here are the key themes:
- Consider whether the risk of greenwashing is present within the firm and adopt a strategy for mitigating this.
- Consider the findings of the FCA's upcoming publication of a review of firms' ESG oversight practices and use these to benchmark the firm's own practices.
- Outline an assessment of the extent to which net zero commitments have been considered in transition planning at the firm.
- Make first TCFD aligned disclosures this year (if in scope) (reflecting PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA regulated pension providers).
- Take all necessary actions to ensure the recommendations in the letter are met and reinforce accountabilities with senior managers for greenwashing risks.
The FCA also gives some hints around what its oversight agenda will look like when it comes to ESG and sustainability:
- As this is a relatively new regime, the focus is on supervision at this stage as firms start to put in place a new regulatory framework to avoid greenwashing practices.
- FCA supervisory activities are going to focus on the governance structures that oversee ESG. The FCA confirms that governance arrangements should be structured to efficiently oversee ESG / sustainability information and claims, as well as their integration into investment processes.
- The FCA propose to test whether firms will deliver on the claims made in their ESG communications with investors; focusing supervisory activities on outlier firms that have been identified in previous supervisory activities or other ongoing surveillance.
Including ESG and sustainability in a Dear CEO letter makes it clear that these issues are top of the regulatory agenda for the FCA. It is also obvious from the letter that the FCA expects action to be taken from on high; that senior managers within asset managers will be accountable for making sure anti-greenwashing practices are embedded within their firms. Finally, it is helpful to note that the FCA will be focussing on outlier firms (and even these repeat offenders will be subject to supervisory activity rather than enforcement action, it appears); it looks as though the FCA wants to work together with asset managers to embed sustainability practices within their businesses and encourage a cultural, top-down change.
"In any future supervisory engagement with you, we will consider whether your governing bodies, and Senior Managers with accountabilities have taken appropriate action to ensure that consumers and markets are adequately protected from these harms."