With the growth in demand for ESG/Sustainable investment products, there is an increased need for firms to be alert to the potential gap between customer expectations of their ESG investments, and the realities of what ESG investments may comprise.

There is potential for this expectation gap to widen where there is poor disclosure and a lack of commonality amongst definitions, standards, and measurement criteria to support ESG credentials - given this lack of commonality, it is even more important for firms to ensure retail investors are adequately informed.  As standards develop, firms may need to establish and embed frameworks to ensure compliance and help in the mitigation of risks, including greenwashing risk. 


What are the FCA’s expectations on the marketing of Sustainable Investments and pensions? 

“We will identify where firm practices do not meet our expectations (e.g. greenwashing) and intervene swiftly to protect consumers.” FCA Business Plan 2022/23


The FCA's expectations are embodied primarily in the Principles for Businesses (PRIN) and the Conduct of Business (COBS) sourcebook, which are used in assessing the adequacy of the sales of financial products.  The standard which they expect firms to achieve is ‘good outcomes’ for customers, and we expect the FCA's bar for assessing ‘fair, clear and not misleading’ is high.

Where firms fall short of these expectations, they might be subject to regulatory enforcement action, including fines and customer redress, in addition to suffering reputational damage.

In July 2021, the FCA published a ‘Dear Chair’ letter with the aim of improving quality and clarity of ESG and sustainable investment funds, the guiding principles being consistency of design, delivery and disclosure. These principles are not new, they are based on existing, long standing rules and Boards should consider how their firm is meeting them whilst ESG specific standards develop.  A summary of key questions Board should be considering, are set out below:   


The questions that boards need to be asking to satisfy themselves that their firm is meeting the FCAs expectations of marketing sustainable investments.

Principle 1 - Design
The design of responsible or sustainable investment funds and disclosure of key design elements in fund documentation.
Fund name.  Does the fund pursue ESG themes or outcomes in a way that is substantive and material to the fund’s strategy?
Investment objectives.  Is the management of funds consistent with the ESG objectives laid out in the fund prospectus and does the fund’s annual report include a review of the investment activities during the period?
Investment Strategy. Does the disclosed ESG strategy include sufficient information for customers to make an informed decision? Does the firm describe key elements of the strategy such as specific E, S or G themes and ‘real world’ (non-financial) impacts pursued, benchmarks to be followed, selection criteria (positive or negative)?
Stewardship.  Are there adequate and effective strategies for ensuring the exercise of voting rights is undertaken in accordance with the ‘green’ objectives of the fund?

Principle 2 - Delivery 
The delivery of ESG investment funds and ongoing monitoring of holdings.
Resources to support delivery.  Are adequate resources effectively employed to achieve the proper performance of the stated ESG outcomes and objectives of the fund?
Data, research and analytical tools.  Is reliance placed on third-party ESG ratings, data and research to support ESG delivery? Has due diligence been undertaken, is there sufficient oversight to ensure an understanding of what happens inside their ‘black-box’ analysis and that we understand the data used?  Is the firm confident that existing language on ESG will stand up to scrutiny?
Holdings.  Would a reasonable investor consider the fund’s holdings reflect the ESG characteristics or outcomes that we have disclosed or claims that we have made?

Principle 3 - Disclosure
Pre-contractual and ongoing periodic disclosures on responsible or sustainable investment funds should be easily available to customers and contain information that helps them make investment decisions.
Easy availability.  Can customers access relevant ESG related information to inform their investment decisions and monitor outcomes?
Pre-contractual disclosures.  Do the fund's key marketing documents reflect the ESG characteristics in a clear, fair and not misleading way?   Is the information clear, succinct and comprehensible, and sufficient to support informed decision making?
Ongoing performance reporting.  Are appropriate steps taken to make information on how well a fund is meeting its stated ESG objectives available to consumers on an ongoing basis? Does the information enable consumers to monitor whether their expectations are being met?


The key challenges for firms

Design: building and maintaining a product design process that rigorously examines suitability of the specific ESG strategy selected and adapts to ongoing regulatory change.

Delivery: notably, where firms outsource these activities to third parties, they should ensure there is sufficient due diligence being undertaken.

Disclosure: establishing and running a sales process to ensure customer understanding, addressing the potential expectation gap, and maintaining the need to draft fair, clear and not misleading literature.


Other relevant articles

Greenwashing risks in asset management: staying one step ahead

Greenwashing - Product Development Considerations for Financial Services Firms

Identifying and mitigating Greenwashing Risk: Considerations for Insurance Firms