19 July 2021 
 
Dear AFM chair,  
Authorised ESG & Sustainable Investment Funds: improving quality and clarity  
The growth of investment funds whose strategy focuses on Environment, Social & Governance (ESG) 
themes has the potential to contribute meaningfully to addressing climate change and other 
sustainable investment goals. Consumers are placing significant value on ESG-related investment 
opportunities.  
It is therefore essential that funds marketed with a sustainability and ESG focus describe their 
investment strategies clearly and any assertions made about their goals are reasonable and 
substantiated. We have seen numerous applications for authorisation of investment funds with an 
ESG or sustainability focus. A number of these have been poorly drafted and have fallen below our 
expectations. They often contain claims that do not bear scrutiny. Also, we would have expected 
questions raised at the authorisation stage to have been asked (and addressed) in the product design 
phase.  Such applications are likely to fail to meet the applicable requirements as set out further in 
the annex to this letter. We expect to see material improvements in future applications. We also 
expect clear and accurate ongoing disclosures to consumers where funds make ESG-related claims, 
and we want to see funds deliver on their stated objectives and/or strategy. We include in this letter 
a set of guiding principles that explains our expectations in this area.  
Building trust in the market 
ESG and sustainable investment funds are currently the fastest growing segment of the European 
funds market, reflecting increasing investor appetite for these investments. Authorised Fund 
Managers (AFMs) have responded to this demand. We have seen a high volume of applications for 
authorisation of funds with an ESG focus in addition to a number of existing funds amending 
objectives, demonstrating that the market is evolving quickly. There is now a wide spectrum of ESG 
and sustainable investment funds, reflecting different objectives, investment strategies and 
characteristics. We welcome innovation within the ESG and sustainable investment market that offers 
consumers funds that meet their needs and preferences. Equally, we recognise that innovation and 
the rapid pace of change present the industry with challenges (such as improving ESG-related data 
and metrics) and that ongoing work is taking place to meet these challenges. 
Against this backdrop, we are concerned by the number of poor-quality fund applications we have 
seen and the impact this may have on consumers. This must improve. 
As the ESG and sustainable investment market grows, we have a role as the regulator to build trust in 
this segment of the market. We expect firms to play their part in this too; we want them to be putting 
consumers at the heart of their businesses, offering products and services that are fit for purpose and 
which they know represent fair value. Additionally, a well-functioning ESG and sustainable investment

market is important for the proper allocation of capital in pursuit of a net zero economy. There are 
serious long-term consequences if the market does not function properly in the face of the global 
challenge with which we are presented. 
Where consumers find it difficult to assess whether authorised funds meet their needs and 
preferences (at the point of purchase and on an ongoing basis), there is potential to undermine trust 
and deter consumers from this segment of the market. This in turn could result in a lack of effective 
competition between the firms providing ESG or sustainable investment funds. As investor appetite 
for these investment funds grows, we expect these concerns also to grow.  
What we are seeing 
We have set out below a number of stylised examples of applications for authorisation of investments 
funds with an ESG/sustainability focus that have fallen below our expectations:  
• 
A proposed passive fund had an ESG-related name that we found misleading as it was looking 
to track an index that did not hold itself out to be ESG-focused. It also had very limited 
exclusions from the index, based on high-level ESG criteria. 
 
• 
A fund application claimed to have a strategy to invest in companies contributing to ‘positive 
environmental impact’. The fund intended to invest predominantly in companies that, while 
reporting low carbon emissions, would not obviously contribute to the net-zero transition. We 
had expected to see a measurable non-financial objective alongside the financial objective or 
strategy with information on how that impact would be measured and monitored.   
 
• 
Instances where it was challenging to reconcile the fund’s proposed holdings with statements 
made setting expectations for consumers. One example was a sustainable investment fund 
containing two ‘high-carbon emissions’ energy companies in its top-10 holdings, without 
providing obvious context or rationale behind it (eg, a stewardship approach that supports 
companies moving towards an orderly transition to net zero). 
In general, fund applications in this area often do not contain sufficient, clear information explaining 
their chosen strategy and how this relates to the assets selected for the fund. We would expect 
applications to contain this level of information at the outset. 
What we are doing 
We continue to challenge firms at the authorisation gateway to help ensure that new (or repurposed) 
funds submitted for authorisation meet our regulatory requirements. We want firms to communicate 
clearly and avoid making misleading claims, both at the time of application and on an ongoing basis. 
We continue to discuss with firms their assessments of the value provided by their funds. Where firms 
are providing an ESG service as part of a fund's offering, we expect them to be able to explain to us 
how they have considered the quality of this service in the context of the fees they are charging.  
There are clear requirements on firms that they should be meeting in respect of the funds they 
provide. Nevertheless, we have received feedback which suggests some firms would find it helpful if 
we provided further clarity on how these requirements apply in the context of ESG investments. So, 
to reinforce our expectations – pre and post authorisation - and to support firms in the application of 
the existing legal requirements, we have developed the guiding principles in the annex for the design, 
delivery and disclosure of responsible and sustainable investment funds.

The aim of the guiding principles 
The aim of the guiding principles is to help AFMs comply with existing requirements by ensuring that 
fund disclosures accurately reflect the nature of the fund’s responsible or sustainable investment 
strategy in both the pre-contractual documentation (for example, the prospectus) and on an ongoing 
basis. We also want to see AFMs deliver on their funds’ stated objectives and strategy and to provide 
sufficient information to enable consumers to monitor whether their expectations are being met.  
If consumers understand the basis on which sustainability claims are being made by AFMs, and can 
monitor whether those claims are being met, this should improve the functioning of the market. It will 
reduce the risk that they buy products that do not meet their needs and create greater trust in ESG 
products. 
Related initiatives 
There are links between the guiding principles and other regulatory initiatives, such as the EU’s 
Sustainable Finance Disclosure Regulation (SFDR). We acknowledge that, while SFDR has not been 
onshored in the UK, some UK authorised firms may also be complying in relation to their cross-border 
business in the EU. The intent of these guiding principles is to be complementary to obligations under 
SFDR. 
Our broader work on climate- and sustainability-related matters is reflected in our 2021-22 Business 
Plan  and is consistent with expectations in our ’remit’ letter  from the Chancellor, received in March, 
specifying that we should consider the Government’s net-zero commitments when we work to 
advance our objectives and perform our functions as a regulator.  
So, the guiding principles are not the end point of setting out our expectations in this space, and they 
have been developed with the aim of being compatible with prospective future disclosure rules for 
responsible and sustainable investment fund products. These include the plans announced in the 
Chancellor’s Mansion House speech to introduce economy-wide Sustainability Disclosure 
Requirements and sustainable investment labels that allow consumers to compare the impacts and 
sustainability of their investments. We will be working closely with HM Treasury on these new policies. 
Furthermore, we are currently consulting on the implementation of TCFD-aligned disclosure rules for 
asset managers, which include certain entity and product-level disclosure requirements. 
Our Business Plan also highlights a range of other outcomes we want to achieve, consistent with our 
remit letter, including promoting active investor stewardship that supports a market-led transition to 
a more sustainable future, and encouraging the development of innovative technological tools to help 
overcome industry and regulatory challenges.   
What you should do next 
When submitting fund applications, and in managing funds on an ongoing basis, we consider that the 
guiding principles will help you get it right. Where your funds make ESG or sustainable related claims, 
you should consider how you clearly and accurately disclose and reflect the nature of the fund in line 
with those claims to enable consumers to make an informed judgement about the merits of investing 
in a fund. If you have any questions about anything in this letter, including the guiding principles 
themselves, please contact your normal supervisory contact.  
Yours faithfully, 
Nick Miller,  
Head of Department, Asset Management Supervision

Annex: Guiding principles 
When are the guiding principles relevant? 
The guiding principles are relevant where an FCA authorised investment fund pursues a responsible 
or sustainable investment strategy and claims to pursue ESG/sustainability characteristics, themes or 
outcomes. These principles are targeted at funds that make specific ESG-related claims, not those that 
integrate ESG considerations into mainstream investment processes. 
The guiding principles have been developed with reference to existing statutory requirements, and 
existing Handbook rules and guidance. They set out how these rules apply in the context of the design, 
delivery and disclosure of responsible and sustainable investment funds. These provisions are 
important to protecting consumers.   
Among the key existing legal requirements that apply to AFMs and to the authorised funds that they 
manage are:  
(i) 
PRIN 2.1: Principle 7, COBS 4.2.1R –clear, fair and not misleading communications 
(ii) 
Reg. 15(9) of the OEIC Regulations, s.243(8) and s.261D(10) of FSMA (see also COLL 6.9.6G) 
- Undesirable or misleading names  
(iii) 
COLL 4.2.5R(3)(a) and (b); COLL 8.3.4R(3) – Contents of the prospectus of an Authorised 
Fund - Investment objectives and policy 
(iv) 
COLL 6.6.3R(3)(a); COLL 8.5.2R(3)(a) - Functions of the authorised fund manager  
(v) 
COLL 4.5.9R; COLL 8.3.5CR - Authorised fund manager's report 
(vi) 
COLL 6.6A.6R - Strategies for the exercise of voting rights  
(vii) 
SYSC 4.1.2CR, AIFMD level 2 regulation art 37 – resources for management companies and 
AIFMs 
 
The guiding principles comprise an overarching principle and three supporting principles that focus, 
respectively, on ‘design’, ‘delivery’ and ‘disclosure’. Each principle is accompanied by a set of ‘key 
considerations’, which add clarity.   
 
Overarching principle: Consistency 
A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and 
disclosure. A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated 
objectives, its documented investment policy and strategy, and its holdings. 
We expect authorised investment funds pursuing a responsible or sustainable investment strategy 
and that claim to pursue ESG/sustainability characteristics, themes or outcomes to consider the 
overarching principle, supporting principles and key considerations.   
Principle 1. The design of responsible or sustainable investment funds and disclosure of key 
design elements in fund documentation 
References to ESG (or related terms) in a fund’s name, financial promotions or fund documentation 
should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or 
investment policy and strategy of the fund.

Key considerations 
a.  Fund name. Fund names are subject to restrictions1 and they must not be misleading. Where 
a fund uses ‘ESG’, ‘green’, ‘sustainable,’ ‘responsible,’ ‘ethical’, ‘impact’, or related terms in its 
name, this could be misleading unless the fund pursues ESG/sustainability characteristics, 
themes or outcomes in a way that is substantive and material to the fund’s objectives, 
investment policy and strategy. 
b. Investment objectives and policy. The prospectus of a fund must include its objectives and 
policy2. A fund must be managed consistently with these3. The annual report of a fund must 
include the policy and strategy pursued for achieving its objectives and a review of the 
investment activities during the period4. Irrespective of whether its name contains a term in 
(a) above, where a fund claims to pursue ESG/sustainability characteristics, themes or 
outcomes, these should be appropriately reflected in the fund’s objectives and/or policy. 
 
c. Investment strategy: An AFM is required to disclose information about a fund in its prospectus 
which investors would reasonably require for the purpose of making an informed judgement 
about investing in the fund5. Where a fund claims to pursue ESG/sustainability characteristics, 
themes or outcomes, we expect that this information should include key elements of strategy. 
For example:  
• 
the investible universe, including investment limits and thresholds  
• 
any screening criteria (positive or negative) that it applies  
• 
specific E, S or G characteristics/themes or ‘real world’ (non-financial) impacts that it 
pursues  
• 
the application of benchmarks/indices, including any tilts to mainstream benchmarks, 
and expected/typical tracking error relative to the benchmark 
• 
the stewardship approach of the fund 
 
d. Stewardship approach. An AFM must develop adequate and effective strategies for exercising 
voting rights to the exclusive benefit of the fund, ensuring that the exercise of voting rights is 
in accordance with the investment objectives of the fund.6 AFMs are also subject to the 
requirements in COBS 2.2B either to develop an engagement policy covering certain areas, or 
to explain why they have not done so. Where investor stewardship forms part of a fund’s 
responsible or sustainable investment strategy, we consider that the AFM should develop an 
engagement policy that complies with COBS 2.2B.6R and clarify how stewardship contributes 
to meeting the fund’s intended ESG/sustainability characteristics, themes or outcomes.  
 
Interpretation/application examples  
a. Fund name:  
• 
Where a fund uses ESG or related terms7 in its name, the FCA expects that the 
ESG/sustainability approach will be disclosed in the investment objectives of the fund. 
 
1 Reg. 15(9) of the OEIC Regulations, s.243(8) and s.261D(10) of FSMA (see also COLL 6.9.6G) 
2 COLL 4.2.5R(3)(a) and (b), COLL 8.3.4R(3)  
3 COLL 6.6.3R(3)(a), COLL 6.6A.4R(3) / AIFMD level 2 regulation art 18(3), COLL 8.5.2R(3)(a)  
4 COLL 4.5.9R; COLL 8.3.5CR 
 
5 COLL 4.2.5R (27)(a), COLL 8.3.4R(19) 
6 COLL 6.6A.6R, AIFMD level 2 regulation art 37 
7 For example, ‘ethical’, ‘sustainable’, ‘green’, ‘responsible’.

The FCA would not expect to authorise a fund that contains one of these terms in its 
name, if its investment objectives do not reflect the fund name. 
• 
Where a fund uses one of these terms in its name, the FCA considers that this would 
be misleading unless the investment strategy leads to a material difference in how 
the fund is managed compared to a fund that did not take such considerations into 
account. For example, an index-tracking fund that excludes a small number of 
securities, or where the holdings are not materially different from a similar non-ESG 
index should not use these terms in its name.  
• 
The term ‘impact’ or ‘impact investing’ has specific connotations. The FCA considers 
that a fund that uses the word ‘impact’ in its name in the context of ESG/sustainability 
outcomes should only do so if it is seeking a non-financial (real world) impact, and if 
that impact is being measured and monitored. 
b. Investment objectives and policy: Where it is claimed that a fund pursues ESG characteristics, 
themes or outcomes, these should be appropriately reflected in the fund’s objectives and/or 
policy.  
i. 
For example, a fund that claims to promote positive social change should:  
• 
be specific about what this means 
• 
describe how it aims to achieve this objective through its investment policy and 
strategy 
• 
set out how it will monitor and evaluate whether it has done so.  
ii. 
Where a fund is designed to generate a measurable, beneficial ESG/sustainability 
impact alongside a financial return, the firm should clearly state the intended ‘real-
world’ outcome. 
iii. 
Where an AFM relies exclusively or largely on ESG data provided by a third-party, 
including ESG data that determine which securities qualify to be included (or that 
determine the weights of securities) in an index that a fund is tracking (or uses as a 
benchmark in accordance with COLL 4.2.5R(3)(c-b)), to make judgements about ESG 
matters, it should disclose this as part of the additional information required to be 
included in the prospectus. 
iv. 
Where a fund might hold securities, potentially at a reduced weighting, that an 
investor might not expect, given the ESG/sustainability focus of the fund, this should 
be made clear in the prospectus, including the circumstances when such securities 
might be held and the purposes for which they would be held. 
 
c. Investment strategy:  
i. 
Where a fund integrates ESG considerations into mainstream investment processes 
(with no material ESG orientation in the fund design/strategy), we do not expect to 
see  prominent ESG claims in the fund’s name or documentation, or ESG positioned 
as a key part of that fund’s offering. 
ii. The description of a fund’s strategy should provide sufficient information for a 
consumer to be able to distinguish between offerings that pursue ESG/sustainability 
characteristics, themes or outcomes in different ways. For example, consumers should be 
given sufficient information to be able to distinguish between funds with the following 
(non-exhaustive) characteristics:  
• 
avoiding exposure to investments with certain characteristics – eg, by applying a 
negative screen to exclude companies that fail to meet internationally recognised

standards, such as the UN Declaration of Human Rights; or by avoiding exposure 
to certain sectors, such as oil and gas companies 
• 
applying a positive screen to promote particular sustainability characteristics or 
themes – eg, apply a tilt to the benchmark in an index strategy to overweight 
companies with particular characteristics (such as emissions-based thresholds); 
or invest predominantly in companies engaged in certain activities (such as water 
and waste management) 
• 
pursuing a positive impact  
- 
through direct investment in new sustainable projects (eg, project 
financing of clean energy initiatives)  
- 
by influencing change through active investor stewardship (eg, 
encouraging companies to sign up to net-zero commitments/move 
towards greener investments). 
 
d. Stewardship approach: Where stewardship is part of an active investment strategy, it should 
be clear how monitoring, engagement and voting activity in respect of ESG/sustainability 
matters are integrated with investment decisions, and how escalation and divestment 
decisions are made.  
Principle 2. The delivery of ESG investment funds and ongoing monitoring of holdings  
The resources (including skills, experience, technology, research, data and analytical tools) that a 
firm applies in pursuit of a fund’s stated ESG objectives should be appropriate. The way that a fund’s 
ESG investment strategy is implemented, and the profile of its holdings, should be consistent with 
its disclosed objectives on an ongoing basis. 
Key considerations 
a. Resources to support delivery:  A fund can only be authorised by the FCA if its aims are 
reasonably capable of being achieved.8  This would include any ESG aims or purposes.  An AFM 
must have and employ effectively resources to achieve the proper performance of its business 
activities.9 We expect a firm managing a fund that pursues ESG/sustainability characteristics, 
themes or outcomes to apply appropriate resources to do so. 
b. Data, research and analytical tools: Where a firm uses ESG/sustainability research, data and 
analytical tools to support its fund delivery process, it should employ appropriate resources 
to oversee this. It should also consider due diligence on any data, research and analytical 
resources it relies upon (including when third-party ESG ratings, data and research providers 
are used) to be confident that it can validate the ESG/sustainability claims that it makes.  
c. Holdings. Where a fund pursues ESG/sustainability characteristics, themes or outcomes, the 
AFM should take into account whether a reasonable investor would consider that the fund’s 
holdings reflect any ESG/sustainability characteristics, themes or outcomes that have been 
disclosed or claims that have been made.  
 
 
 
 
 
8 Reg. 15(10) of the OEIC Regulations,  s.243(9) and s.261D(11) of FSMA 
9 SYSC 4.1.2CR cf also SYSC 4.1.2DR, SYSC 4.1.4R, SYSC 5.1.1R, AIFMD level 2 regulation art 22

Interpretation/application examples  
a. Resources to support delivery: Appropriate resources to support delivery can include 
investment professionals with appropriate skills and experience, technological inputs and 
ESG/sustainability-specific research, data and analytical tools. 
 
b. Data, research and analytical tools: A firm should take appropriate steps to:  
• 
monitor the research, data and analytical tools used  
• 
assure the quality of inputs by conducting appropriate due diligence, model validation and 
data governance 
• 
understand how data and research inputs are sourced and derived (including relevant 
methodologies) and consider carefully how any gaps and limitations in such inputs may 
hinder achievement of the fund’s stated objectives.  
 
c. Holdings: Where a fund states that it will invest in companies contributing to ‘positive 
environmental change’, a consumer might reasonably expect fund disclosures to demonstrate 
how the profile of the fund’s holdings and other elements of its strategy, such as the exercise 
of investor stewardship, contribute to outcomes related to matters such as biodiversity and 
the climate transition. Where holdings might appear contradictory to an ESG investment 
strategy, the AFM should consider explaining this apparent inconsistency to end investors. 
 
Principle 3. Pre-contractual and ongoing periodic disclosures on responsible or sustainable 
investment funds should be easily available to consumers and contain information that 
helps them make investment decisions  
ESG/sustainability-related information in a key investor information document should be easily 
available and clear, succinct and comprehensible, avoiding the use of jargon and technical terms 
when everyday words can be used instead.10 Funds should disclose information to enable 
consumers to make an informed judgement about the merits of investing in a fund.11 Periodic fund 
disclosures should include evaluation against stated ESG/sustainability characteristics, themes or 
outcomes, as well as evidence of actions taken in pursuit of the fund’s stated aims.12  
 
Key considerations  
a. Easy availability. A firm should take appropriate steps to enable consumers to access relevant 
ESG/sustainability-related information to support their investment decisions and monitor 
outcomes – including, to the extent possible, where a fund is marketed via a distribution 
platform13.   
b. Pre-contractual disclosures. We expect information on a fund’s ESG/sustainability focus to be 
made available to consumers in relevant regulatory documents14 and be reflected in any 
 
10 UCITS KII regulation art 5(1)(b) and NURS-KII rules at COLL Appendix 2 art 5(1)(b), cf also PRIIPs regulation art 
6(4)(c) 
11 COLL 4.2.5R(27) 
12 COLL 4.5.9R(6)/(7) 
13 PRIN2.1 
14 the prospectus and key investor information document or key information document, see COLL 4.2 and COLL 
4.7, and the information required by FUND 3.2.2R (where relevant)

accompanying marketing materials in a clear, fair and not misleading way. The information 
should be presented in an accessible way that is clear, succinct and comprehensible, and that 
forms a sufficient basis to support consumers in making informed investment decisions.  
c. Ongoing performance reporting. A firm should take appropriate steps to make information on 
how well a fund is meeting its stated objectives (i.e. intended ESG/sustainability 
characteristics, themes or outcomes) available to consumers on an ongoing basis (for example 
in annual and half-yearly reports). Such information should enable consumers to monitor 
whether their expectations are being met. 
 
Interpretation/application examples  
a. Easy availability: Where a firm relies on third-party data and analytical tools to support its 
fund disclosures, it should provide (subject to intellectual property considerations) 
interpretative information, describing relevant methodologies used and highlighting any 
material data considerations/limitations. 
 
b. Pre-contractual disclosures: We expect the firm to take appropriate steps to include relevant 
and accurate information on the fund’s ESG/sustainability focus in pre-contractual fund 
documentation (eg, prospectus / K(I)ID), and any accompanying marketing materials), 
presenting its disclosures in a way that can readily be interpreted by consumers. For example, 
if a fund aims to create ‘positive sustainability impact’, we expect its disclosures to include 
clear examples of the real-world impact that it is pursuing, how it proposes to achieve the 
target impact (eg, its screening criteria exclude  investments in fossil-fuel companies), and 
how performance against this stated objective will be evaluated on an ongoing basis (eg, 
metrics, criteria).  
 
c. Ongoing performance reporting: 
• 
Key Performance Indicators (KPIs). Where a fund applies quantifiable targets, reporting 
should include relevant KPIs, along with sufficient supporting information to enable end 
investors to interpret performance data, in a way that is not misleading. For example, a 
fund that invests in companies with ‘green’ characteristics in their targets (eg, carbon 
emissions, green revenues) should include KPIs on these characteristics in its ongoing 
performance reporting. 
• 
Non-financial (real world) outcomes. Where a fund pursues non-financial outcomes, 
performance against such outcomes should, as far as reasonably feasible, be reported in 
a measurable and quantifiable way, using relevant standards/frameworks and 
methodologies, as appropriate. Where a fund pursues less measurable non-financial aims, 
performance against these should be evidenced and evaluated, with examples of actions 
taken in pursuit of these aims. For example, where relevant, we expect evidence of a 
fund’s ‘positive sustainability impact’ to be provided on an ongoing basis to investors.    
• 
Stewardship: Where stewardship forms an integral part of a fund’s delivery strategy, the 
firm should articulate clearly, on an ongoing basis, how the execution of its stewardship 
strategy has supported the achievement of its stated objectives.