The FCA has set out good and poor practices for asset managers to consider in relation to funds with ESG or sustainable characteristics.

By Nicola Higgs, Anne Mainwaring, and Charlotte Collins

On 16 November 2023, the FCA published the findings from its review of how asset managers have been embedding current regulatory expectations regarding the design, delivery, and disclosure of funds marketed as having ESG or sustainable characteristics.

With the FCA yet to finalise its Sustainability Disclosure Requirements (SDR) and investment labelling regime, it reviewed authorised fund managers’ (AFMs’) compliance with existing regulatory requirements, including the Guiding Principles set out in the Dear Chair letter issued in July 2021 (see this Latham blog post). The recently implemented Consumer Duty has added an extra dimension for AFMs to consider since the Guiding Principles were issued. The FCA highlights that the consumer understanding outcome is particularly relevant for AFMs providing ESG or sustainable funds; under this outcome, firms need to provide investors with the information they need at the right time and present it in a suitable way.

The FCA notes that it found evidence of good practices and that some progress has been made, but it also found evidence of poor practices and considers that AFMs need to continue to make improvements. The FCA remains concerned that some claims about ESG and sustainable investing could be misleading or inaccurate. It notes that assessing funds against its findings will be a useful exercise for AFMs in preparing for the SDR, and expects AFMs to address its concerns before preparing to comply with the higher standards in the SDR.

Key Findings

The FCA reports that it generally found good intent from AFMs to embed the Guiding Principles and other regulatory expectations. However, the FCA found various shortcomings with AFMs’ disclosures in particular. It also found that AFMs generally encountered difficulties when overseeing older funds that had been adapted to incorporate ESG and sustainability objectives. We summarise some of the specific findings and recommendations for good practice below.


  • Although some products reference ESG or sustainability in their names, some of these lacked an explicit ESG or sustainability objective (although ESG and sustainability outcomes were typically reflected in the investment policy and/or strategy).
  • Good practice includes AFMs incorporating more explicit and detailed ESG and sustainability approaches within the fund prospectus, and seeking to achieve specific and defined investment aims, such as delivering a particular environmental or social impact.
  • The FCA found that AFMs could do more in their fund and firm-level disclosures to explain their stewardship approach. The design of their approaches generally did not meet FCA expectations and it was often difficult to identify clear examples of progress resulting from AFMs’ engagement with investee companies.
  • Good practice includes embedding stewardship activity within investment teams, having active engagement policies, and recording outcomes of stewardship activities.


  • The FCA found some instances in which fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives. Some AFMs were not able to explain how these holdings were consistent with the ESG or sustainability characteristics of the fund.
  • Good practice includes having a credible, defined, and documented approach to the treatment of holdings that appear inconsistent with a fund’s objectives.
  • Good practice also includes embedding a strong focus on due diligence for asset selection, carrying out appropriate due diligence on third party data providers, and maintaining appropriate systems and controls to assess the ongoing appropriateness of ESG data.


  • Key ESG and sustainability information was often not explained or put into context in disclosures. For example, some AFMs did not explain that they excluded Scope 3 emissions from their disclosures. The FCA reiterates that it expects AFMs to explain any material data limitations or considerations in fund disclosures.
  • Firm-level disclosures were not easily reconcilable with fund-level disclosures. The FCA commonly found fund prospectuses offered little detail on ESG and sustainability policy goals, referring instead to firm-level policies, and individual funds varied in their alignment to these policies.
  • Key ESG and sustainability information was not always clearly presented and made accessible, which could make it challenging for investors to understand. Sometimes it was included in supplementary reports that were difficult to find, and cross-references were not always up to date.
  • Good practice includes testing how investors understand information about the fund, and providing disclosures that are clear about the ESG and sustainability features of a fund, what it is designed to offer, and how the AFM measures performance on an ongoing basis.


  • The FCA found that AFMs need to refine their existing oversight and controls. The FCA highlights that AFMs should ensure that their strategies and intent are matched with appropriate oversight and control frameworks that are able to identify, monitor, and manage the risk of poor outcomes, particularly from unclear ESG and sustainability disclosures.
  • Good practices include maintaining a strong product governance structure, monitoring adherence to funds’ investment objectives and policy, appropriately monitoring relevant management information, and ensuring that suitable investment policies and processes are embedded within the AFM.

Next Steps

Although some time has passed since the Dear Chair letter was published, the market for ESG and sustainable funds is still evolving and many of the challenges within this market are widely known. The findings provide some helpful food for thought for AFMs as they prepare to digest the FCA’s final rules on the SDR regime. The final rules will help provide clearer and heightened standards which, along with the regulation of ESG ratings providers (see this Latham blog post), should drive more consistency in the market and help mitigate against greenwashing risks.

The FCA expects boards to take the lead in monitoring this area and ensuring AFMs make any required changes. AFMs will need to review their ESG and sustainable fund ranges and assess whether their disclosure material meets FCA expectations. The FCA states that it will continue to monitor this area, including challenging funds at the authorisation stage if applications present concerns. The SDR and the FCA’s anti-greenwashing rule will take effect in 2024.