The Investment Association (IA) is consulting on proposals which would see retail investors provided with product labels for funds linked to sustainability and responsible investing (SRI) products, in efforts to aid investors in achieving “both their financial as well as their environmental and social goals”.

As part of a suite of proposals on sustainability and responsible investment, the IA identified growing retail interest in SRI products and the industry’s duty to “help our clients (especially retail) to navigate the UK fund universe effectively” as the drivers behind its latest consultation paper.

The product label would improve the “visibility” of SRI products to retail investors, including end consumers, platform providers and IFAs, the IA explained.

Implemented across all asset classes, it would aim to give greater detail over the breadth of offering, improve clarity and comprehension of fund objectives, give greater confidence in what clients are buying, and stimulate interest in sustainable investment approaches.

It would take the form of two labels; one would be used for investment approaches that have as their objective to generate sustainable returns for investors through long term-value creation; the other would be for strategies with an explicit sustainability objective.

Under the proposals, the label would be voluntary with the option of having it verified by an independent third party.

In order to measure the success of the label, the IA proposes that within the first 18 months of any label’s implementation a product label provider would look at the number of funds engaging with and adopting it.

In addition, after 24 months after launch of any label, success is measured on the basis of asset flows into products with the label.

Elsewhere, the IA is consulting on establishing a set of industry-endorsed standard definitions on SRI, applicable to all asset classes and covering the most common approaches to sustainability and responsible investment carried out by the IA membership.

The trade body is also using the consultation as an opportunity to discover how firms have embedded ESG into their investment approach, and how they disclose against a framework of environmental or social indicators and metrics.

The proposals follow the establishment of the now 35-firm-strong IA Sustainability and Responsible Investment Committee in 2018 as the trade body sought to embrace SRI as part of its policy goals.

It said that one option the committee considered was creating a new IA sector for SRI vehicles, but that this would be problematic as many funds with an SRI approach will already have a place in asset-based sectors.

Therefore, the IA is proposing a label system “to provide a shortcut to understanding whether an individual fund is adopting a specific investment approach” and “draw attention to sustainability and responsible investment”.

Regulatory pressure

The IA noted the proposals “[do] not exist in a vacuum” and come in the wake of a raft of regulatory and political initiatives with regard to sustainable finance.

It coincides with separate initiatives from the FCA and the European Commission with regard to ESG fund products, though both have a specific focus on environmental concerns.

The FCA’s Green Finance consultation, which is consulting how climate change could pose risks to the markets and institutions it regulates, closes for comment on 31 January.

Elsewhere, the British Standards Institute is set to produce two Publicly Available Specifications to be issued for public consultation between March and May 2019 on Sustainable Finance and Sustainable Investment Management, in efforts to produce a set of global standards for sustainable finance.

“The asset management industry is at a critical juncture in embracing sustainability as a defining feature of the investment landscape.

“With sustainability and responsible investment becoming an increasing priority for today’s investors, this consultation is an important step forward in gathering the views of the industry with the ultimate aim of bringing greater clarity to savers.

“As significant investors, it is our role to help today’s investors achieve both their financial as well as their environmental and social goals.”

Reaction 

Investment Week understands the IA has been working with European regulators as well as multiple industry working groups, all of whom are backing the trade body’s efforts.

Commenting on the proposals, CEO of the IA Chris Cummings said: “Social and environmental change is happening faster than ever before.

Patrick Thomas, investment manager at Canaccord Genuity Wealth Management, described the proposals as “helpful” and said they would aid with differentiation between the raft of strategies coming into the market.

He explained: “The passive industry is launching a lot of these products and the major fund houses they can see it is becoming a popular [commercial] strategy.

“In ESG and SRI products, you can have anything from an old school, exclusionary fund, all the way up to the latest clean tech impact fund. Both do very different things.

“But you have nothing governing how ESG focussed funds actually are.”

However, Thomas noted that SRI and ESG “is not overly complex and actually gets complicated by fund groups”.

He believes the products should be separated into three distinct categories; traditional exclusionary, ESG and impact.

Thomas said: “ESG is more about optimising risk/return by finding companies that have good records on ESG issues. It is a much more empirical strategy and the distinction is important.

“Impact is any fund trying to achieve both a financial goal and some sort of positive good for the world.

Those three categories are quite distinct and generally encompass most of the different strategies out there.”

Similarly, CIO at Wellian Investment Solutions Richard Philbin said that existing standards for measuring sustainability can be too vague and can be interpreted differently, such as the 17 UN Sustainable Development Goals, which “are to be admired and welcomed, but they are also incredibly broad based”.

He added: “When you look at existing ‘ethical’, ‘green’ or ‘sustainable’ funds out there, you will find they all have different outlooks and objectives.

“Positive screening or negative screening can provide very different outcomes.

“I once interviewed a fund manager whose largest shareholding was Shell. When I asked how this company was in his fund, his response was ‘they are better than BP’.

“Overall, I can see the whole ‘sustainable’ movement lasting about a decade. By then it will be a standard input for analysts and managers when they research companies. It won’t be called ethical investing, it will just be called investing.”

Mike Fox, head of sustainable investments at Royal London Asset Management, welcomed the IA’s propositions, adding that it “will be a significant step in providing clarity and consistency to a fast evolving part of the investment industry.”

He said: “Sustainable and responsible investing is a rapidly growing role for asset managers to adopt in an effort to support positive social and economic development.

“This, coupled with delivering on the needs of savers, is becoming increasingly important.”

Director of passive strategies and sustainability research, Europe at Morningstar Hortense Bioy said the product label concept “is an interesting proposition” but a number of such labels already exist, particularly in continental Europe.

She added: “What investors really need is harmonisation. It would make sense to do it at the European level. Although with Brexit, the UK may want to do its own thing.”

However, Bioy also noted that the standardisation of SRI definitions “will help investors navigate the complex and multi-faceted ESG landscape” and “add a level of granularity that is not available today”.

She said: “Investors looking for a specific outcome will be able use these definitions and data points to screen the sustainable investment universe.”

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 25 January 2019.