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The UK FCA’s Guiding Principles for authorised funds with ESG or sustainability characteristics

  • United Kingdom
  • ESG
  • Financial services and markets regulation - ESG
  • Investment funds and asset management
  • ESG
  • Financial services

19-07-2021

What are the Guiding Principles?

On 19 July 2021, the FCA published its “Guiding Principles for authorised funds with ESG or sustainability characteristics” (the Guiding Principles).  Taking the form of a letter to the Chairs of authorised fund managers, the Guiding Principles represent the FCA’s expectations for the Design, Delivery and Disclosure around funds with ESG or sustainability characteristics in their name, investment objective, policy, or marketing materials.  The FCA also highlights an overarching expectation that funds should have a common thread running through the product’s design and literature: from its name to its investment policy to its periodic reporting; so that there are ‘no surprises’ for investors.

We are delighted that our Eversheds Sutherland webinar, “ESG for asset managers: Regulatory round-up with the FCA”, tomorrow afternoon (3pm BST, Tuesday 21 July 2021) features Mark Manning (Technical Specialist in Sustainable Finance and Stewardship at the FCA) delivering a speech outlining the FCA’s work in green and sustainable finance, including the Guiding Principles.

What is the legal basis of the Guiding Principles?

The Guiding Principles are expectations, not rules.  That means that they are not individually binding but we expect the industry and the FCA to approach them on a comply or explain basis.  Firms should expect to live and breath them through their interactions with the Fund Authorisations team.

The Guiding Principles are essentially an interpretation of an existing body of rules.  That means that they are already in place.  There is no grandfathering period.

Which products/services are in scope?

The Guiding Principles do not apply to unauthorised funds, incoming EEA funds, segregated mandates or other investment management services like model portfolios.

The letter was written to the Chairs of authorised funds specifically and the Guiding Principles are based on an existing body of rules that is skewed towards UCITS and NURS.  That said, we would expect these principles to be read across to QIS too, as we have seen for similar initiatives, and they may be soft enforced for QIS at the authorisations gateway. 

In the case of authorised funds, the Guiding Principles relate to absolutely any ESG or sustainability characteristics; whether in the name, objective, policy, strategy or marketing materials.  However, clearly the focus will be on investment objectives and policies.  

What are you required to do?

While the Guiding Principles don’t trigger prescribed disclosure or metrics like the EU’s Sustainable Finance Disclosure Regulation (“SFDR”), they arguably require a much more tailored response.  They are, in many ways, the evolution of the non-handbook guidance from the FCA’s Asset Management Market Study.  Firms will need to consider the totality of their product’s core literature, looking for gaps, inconsistencies and potentially making difficult choices about whether aspects like product names would meet the FCA’s expectations.

The letter is written very accessibly and gives illustrative examples to provide colour around the wording of the rules.  It is densely packed with useful takeaways, and it is not feasible to summarise it comprehensively.  However, the following short paragraphs will give you an indication of what is covered.

  1. The first Guiding Principle concerns ‘design’.  The FCA is looking for funds to be appropriately named, for non-financial objectives to be fair, clear and not misleading, that sustainability aspects are fairly reflected and not overemphasised, that the actual strategy employed is visible (including exceptions).  Firms will also need to explain their stewardship practices – something not commonly included at fund level.
  2. The second Guiding Principle concerns ‘delivery’.  This principle is more targeted at behind the scenes matters like system and controls and due diligence.  It will be of particular interest to senior management and to those looking after distribution arrangements since there are obligations to flow down to distributors. 
  3. The last Guiding Principle concerns ‘disclosure’.  This is broadly a requirement that disclosure needs to be user-friendly, accessible and presented in a way that allows progress to be assessed. 

Are existing funds covered?

Our understanding is that the Guiding Principles apply equally to existing funds as to new funds.

How can Eversheds Sutherland help?

We can help you to conduct a review of your fund range to ensure compliance with the Guiding Principles, we are able to provide workshops on the integration of the Guiding Principles into your fund range.  We can also provide training on the Guiding Principles on request, as well as on other developments in relation to ESG in the UK and Europe.

For more information, please get in touch: