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FCA Cracks Down on Potential ESG ‘Harms’ by UK Asset Managers

The UK Financial Conduct Authority (FCA) has published its first “Dear CEO” letter since the launch of its new “integrated regulatory structure”, which has meant that asset management is now supervised by the UK financial regulator’s Buy-Side Directorate. In its letter, the FCA outlines the harms to consumers or markets that it thinks are most likely to arise from “asset manager” business models and sets out how it intends to supervise this sector to address these potential harms.

ESG and sustainable investing is one of five risks of harm that the FCA focuses on in its letter. The letter encourages CEOs to consider whether the risks identified are present in their firms and recommends that firms adopt strategies to address them. The FCA has signalled its commitment to supporting the financial sector in enabling an economy-wide transition to net zero and to a sustainable future more broadly with a raft of new proposals and legislation, which are set to come into force this year.

Upcoming Regulations

The FCA is introducing a new ESG sourcebook containing rules and guidance. Those firms in scope will be required to make their first disclosures in the first half of 2023, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures. The FCA is also consulting on “clamping down on greenwashing,” the Sustainable Disclosure Requirements and investment labels, and is set to publish its final decision on the proposals and will set out their rules for product disclosure and labelling.

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In addition, the FCA has published its discussion paper “Finance for positive sustainable change,” which encourages an industry-wide dialogue on firms’ sustainability-related governance, incentives, and competencies.

Enforcement in the Meantime

The number of recent ESG-related statements from the FCA shows how seriously it is taking this matter and suggests it will not be sitting on its hands until applicable regulations are in force. It already has a broad range of powers by which it is able to hold asset managers accountable if it considers their ESG communications to be misleading.

The FCA will consider whether governing bodies and senior managers with accountabilities have taken appropriate actions to ensure that consumers and markets are adequately protected from harm. The FCA will focus on assessing the effectiveness of firms’ governance and will take relevant action if necessary.

ASA and CMA Regulatory Oversight

The FCA is not the only authority keeping its eye on the potential for consumer harm arising from the making of environmental claims. The ASA and the CMA have also been very active.

The UK advertising codes, enforced by the ASA, have contained a section on making compliant environmental claims for a number of years. Similarly, the Green Claims Code launched by the CMA in September 2021, was intended to provide brands with guidance to ensure their environmental claims are compliant with existing consumer protection.

The CMA recently launched its second market investigation into greenwashing claims, looking specifically at the environmental claims made in respect of “consumer goods.” The ASA is also continuing active enforcement in this area.

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Osborne Clarke Comment

Asset managers and others who will be making their first climate-related financial disclosures in 2023, in line with the FCA’s ESG sourcebook, should not consider themselves exempt from scrutiny while the market and regulations catch up. Instead, they should take great care in ensuring their disclosures and any green-related statements are fully compliant from the outset and are representative of and proportionate to their overall environmental impact.

At a time when new guidance is being created at pace, it’s important to keep an eye on such changes and keep all forms of ESG disclosures and statements under careful review and scrutiny. The FCA’s crackdown on potential ESG harms is a timely reminder that firms must act in good faith and provide accurate information to consumers and investors, or face the potential consequences of enforcement actions and reputational damage.

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