Is enforcement action on the horizon for failed disclosures - FCA warning for ESG benchmarks

What's happened?

Another day, another 'Dear CEO' letter. This time the FCA has warned ESG benchmark administrators that they are failing to properly disclose sustainability factors in benchmarks.

Benchmark administrators, which can be large financial groups, compile indices from companies with qualifying criteria.

ESG benchmarks are scores used to measure the progress financial products, companies and markets are making against ESG factors, setting standards for asset managers to measure fund performance or create products replicating the index.

In a review of disclosures from a sample of firms, the FCA found that benchmark administrators are not representing ESG factors correctly in benchmarks. This risks giving wrong information to funds and consumers.

Of particular note, the FCA found that:

• firms did not provide enough explanations about how they are reflecting ESG factors in required benchmark statements; and
• benchmark administrators did not explain in enough detail what thresholds they applied when measuring ESG factors in benchmarks.

This follows on from the FCA's previous warning in September 2022 to benchmark administrators, that the quality of benchmarks may not align with user expectations.

This latest letter also highlights the ever increasing prominence of ESG matters on the FCA's regulatory agenda. 

What's next?

The letter confirms that the FCA's planned new rules on 'greenwashing' will require all firms making sustainability-related claims to ensure they are clear, fair and not misleading. The rule is expected to come into force by the end of June 2023. Benchmark administrators must, therefore, consider this in their documentation going forward. 

More ominously, the FCA warns of enforcement action: "Where firms fail to consider our feedback, we will deploy our formal supervisory tools and, where appropriate, consider enforcement action". Only time will tell what this means for benchmark administrators, but fines could well be on the horizon if the FCA's expectations are not met.

In addition to the risk of enforcement action being taken by the FCA against these firms, these failed or inaccurate disclosures create an inflated risk of so-called 'greenwashing' claims being brought by investors in respect of any misstatement or misrepresentation. We will continue to keep you updated.  In the meantime, you can read the full FCA 'Dear CEO' letter here. In addition, should you wish to read an extended piece on the FCA expectations for ESG benchmarks, you can find this here.

Authors:Lynn Dunne, and Andrew Sims