The UK's Financial Conduct Authority has issued a new Sustainability Disclosure and labeling regime meant to protect retail investors from vague ESG claims by asset managers. With more than $18.4 trillion invested in ESG funds globally, the lack of transparency or consistency in the language asset managers use to market their funds is a growing problem.
The FCA's package of new rules will require that funds claiming to be sustainable consist of at least 70% of assets that actually are. Further, asset managers will be required to label their ESG funds under one of four categories —Sustainable Focus, Sustainable Improvers, Sustainable Impact, or Mixed Goals — depending on a specific fund's investment goals.
"Funds can label themselves as having a Sustainable Focus if they invest mainly in assets that achieve a high standard of sustainability," explains Bloomberg. "Sustainable Improvers need to hold assets that have the potential to improve, while Sustainable Impact will be reserved for funds that can prove they’re targeting solutions to social and environmental challenges. The fourth category will allow funds to market themselves as targeting Sustainability Mixed Goals, meaning managers are free to blend different strategies."
The new rules will take effect between May and December 2024. Currently, some 630 funds in the UK would be covered.
The FCA's move follows a similar move by EU financial regulators two years ago and highlights the urgent need for the SEC to follow suit. It's long past time to issue ESG and climate disclosure rules for US funds as well.