The Financial Conduct Authority (FCA) has warned the asset management industry it must improve on the “poor quality” of many ESG fund launch applications it has seen.

In a letter to the chairs of authorised fund managers (AFM), Nick Miller, head of asset management supervision at the FCA, highlighted a number of examples when asset managers have fallen below the regulator’s expectations when looking to bring a sustainable fund to market.

One such example Miller pointed to was a proposed passive fund which had a “misleading” ESG-related name because it was planning 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,” he added.

Overall, Miller stressed it is essential that funds marketed with a sustainability or ESG focus “describe their investment strategies clearly and any assertions made about their goals are reasonable and substantiated”.

However, the letter noted many fund launch applications have been “poorly drafted” which could have a negative impact on investors.

“A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure,” Miller continued. “We want firms to communicate clearly and avoid making misleading claims, both at the time of application and on an ongoing basis.

“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.”

The warning from the FCA comes at a time when asset managers are becoming increasingly scrutinised by regulators on the issue of greenwashing.

Earlier this year, the Sustainable Finance Disclosure Regulation (SFDR), which requires funds to disclose sustainability risks within the investment process, came into effect on 10 March.

Funds are now categorised as either Article 6 – regular funds – Article 8 – “light green” funds – or Article 9 – “dark green” funds such as climate ETFs that look to reduce carbon emissions.

One ESG ETF, in particular, the L&G ESG China CNY Bond UCITS ETF (DRGN), has come under fire this week for “brazenly greenwashing and misleading investors”, according to SCM Direct CIO Alan Miller.

SCM Direct’s Miller argued the index DRGN tracks has very similar weightings to the exact same four bond issuers as the non-ESG China government bond index and called on the FCA to “urgently review…and fine LGIM for mis-selling”.

Legal & General Investment Management (LGIM) declined to comment.

The FCA’s letter concluded: “There are clear requirements on firms that they should be meeting in respect of the funds they provide.

“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.”