The Investment Association sought responses to its consultation on sustainability and responsible investment earlier this year, stating that: “The asset management industry is at a critical juncture in embracing sustainability as a defining feature of the investment landscape.”
Within the scope of the consultation were industry agreed definitions, retail product labels and a clearer view on asset managers’ use of disclosure frameworks on sustainability.
The consultation also noted that: “Policymakers are increasingly looking to the private sector to play its role in delivering a more sustainable world and there is evidence of greater consumer engagement and demand for sustainable investment than ever before.”
Where is the evidence?
In January, Impax Environmental Markets conducted a survey of more than 2,000 UK adults aged over 18 with YouGov.
When asked if they would expect their financial adviser to suggest investment products that they thought would provide positive growth or products that they thought would provide positive growth and positive impact, the latter was favoured – 50 per cent to 23 per cent.
This was not evidence of incremental interest, rather of a significant shift in investment attitude. Respondents were clear, they wanted growth, but they also wanted positive impact and they expect financial advisers to be able to offer products that can deliver this.
Which one, if either, would you like your financial adviser to suggest to you?
I would like my financial adviser to suggest products they think would provide positive growth
I would like my financial adviser to suggest products they think would provide growth and positive impact
Neither of these
Do not know
Source: Investing Money survey conducted by YouGov in conjunction with Impax Environmental Markets (January 2019). (Note: 2,103 adults surveyed).
How can we meet expectations?
Today, the IA’s ethical fund sector incorporates a confusing array of ethical, sustainable, socially responsible and environmental, social and governance investment funds.
In practice, this muddle of terminology can mean that a green/environmental fund is referred to as ethical (it is not).
Is green investing ethical? Perhaps for some, but that is not how it is defined by asset managers for whom ethical investing requires the application of negative screening, filtering out companies investing in certain industries or sectors, fossil fuels and arms manufacturers for instance.
In contrast, funds that invest in environmental markets are likely to believe that in the long-term, companies offering cleaner more efficient services in areas sectors like energy, agriculture, water and waste will provide strong risk-adjusted returns.
Confusing terminology is distracting for investors and advisers alike.
Offering clearer definitions and product labels should be beneficial, and the IA’s consultation is a good start to achieving this. However, the proposed language is more likely to resonate within the investment management community than with retail investors.
Consideration of language and how financial advisers could and would discuss sustainability and impact considerations within the existing fact find and risk tolerance framework would be hugely beneficial, and this is the industry’s moment to do so.
Exploring existing frameworks and language outside of the financial services industry would be worthwhile.
Taking ethical as an example, the proposal is that it is redefined as “negative screened investments”.
Impax has suggested that the IA consider “free from”, terminology that investors understand. It simply conveys the concept of not investing in certain sectors/industries and lends itself to labelling. Advisers could ask clients if they are looking for their investments to be ‘free from’ any types of companies/sectors or if they are looking to invest more positively, seeking growth opportunities and positive impact for example.