The Financial Conduct Authority (FCA) has stated that Environmental Social and Governance (ESG) and Sustainable investments are currently the fastest growing segment of the European funds market. Coupled with this fact, is a growing concern around the number of investment managers promoting these funds with little evidence to substantiate that the investment does what it states on the tin. This approach is often referred to as “greenwashing” which can be described as a form of spin where marketing is spuriously used to persuade an investor that a funds objective is ESG – Sustainably focused.
The FCA has cited a number of instances of investment companies submitting funds for regulatory approval which they have either considered to be misleading or simply lacked adequate controls or thought. A couple of examples provided were an ESG passive fund tracking an index which did not hold itself out to be ESG focused. Another case was a request for approval for a supposedly Sustainable investment fund containing two high-carbon emissions’ energy companies in its top-10 holdings, with no obvious context or rationale behind this decision.
To add a level of control, the FCA published a 9-page letter addressed to Authorised Fund Managers on 19th July introducing three principles. Principles being as far as the regulator can go without the introduction of new legislation (which involves Government intervention). Succinctly the principles cover 1) the design and disclosure of the fund should accurately reflect the objectives and investment policy of the fund; 2) the investment managers skills, experience, technology and analytical tools in promoting and monitoring an ESG lead investment must be robust, consistent and on-going; 3) any literature on responsible or sustainable investment funds should be easily available to consumers and contain information that helps them make informed investment decisions.
So, what does this all mean to me as a potential consumer of ESG or Sustainable funds? Certainly, this acknowledgement by the Regulator that additional robust guidance is needed by fund management groups to ensure that investments deliver what they claim is reassuring. In addition, the principles being introduced support Wingate’s long held views that vigorous filtering is needed to deliver our clients’ requirements for Exclusion (Ethical), Sustainable and Impact risk rated portfolios.
If you would like to understand more around our process for delivering an investment strategy that is aligned to your ethics, please make contact with one of the Wingate Financial Planning team.