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Firms which fail to improve ESG performance will face action, FCA warns

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City Editor

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The FCA said that 83 per cent of the firm's DB scheme transfer advice "failed to comply with its minimum required standards, and customers risked financial loss as a result of the poor advice they received".
The FCA said that 83 per cent of the firm's DB scheme transfer advice "failed to comply with its minimum required standards, and customers risked financial loss as a result of the poor advice they received".

Companies creating benchmarks to measure environmental, social and governance (ESG) performance will be hit with enforcement action if they fail to improve their “poor” performance, the Financial Conduct Authority (FCA) warned today.

The City watchdog has been tightening rules around ESG claims and is set to roll out a host of new measures this year to clamp down on greenwashing. Benchmarks have been used to factor ESG considerations into investment decisions and measure progress towards sustainability goals. 

However in a letter today, the FCA publicly rebuked firms for quality of benchmarking and said a review into the work of firms since September had revealed “poor” work “in general” across the industry.

“There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies,” Jon Relleen, director of Infrastructure & Exchanges at the FCA, wrote.

He added that there were examples where benchmark administrators had “failed to implement their ESG benchmarks’ methodologies correctly” and said some firms had failed to “fully implement the disclosure requirements introduced in the Low Carbon Benchmarks Regulation”.

Relleen added that the FCA will deploy its “formal supervisory tools and, where appropriate, consider enforcement action” if firms fail to consider its feedback and improve performance.

The warnings comes after the watchdog confirmed it would absorb ESG and sustainability claims into its remit in order to stamp out misleading claims made by investment firms.

Efforts to bring green claims within regulation have faced pushback from the industry and MPs. The influential Treasury Select Committee claimed earlier this year that the regulator had used “suspiciously round” numbers to justify its push for regulation in the sector.

A top investment body also slammed the FCA for moving too fast on regulation, warning it risked causing widespread “dislocation” in the sector.