Responsible investing's future  

Responsible and sustainable investing are not the same

This article is part of
Guide to Responsible Investing

The Treasury’s publication of the roadmap follows an earlier announcement that the government would work with the FCA to create a new sustainable investment label, which it also referred to as a quality stamp, so consumers can clearly compare the impacts and sustainability of their investments.

Following in the EU’s footsteps

The awaited UK Sustainability Disclosure Requirements is reminiscent of the EU’s Sustainable Finance Disclosure Regulation.

But as Jamie Govan, senior ESG investment manager at Abrdn, points out, different countries use different terms. “I think a big problem you face as you go around the globe is, how do you get different countries to agree on that terminology?” he adds.

In a survey of 11,000 individuals across 11 countries in Europe and Asia, commissioned by Architas, 'sustainable investing' was the most recognised term by 48 per cent in Europe and 54 per cent in Asia.

A third recognised the term ‘green investing’ or ‘responsible investing’. Meanwhile, the term ‘ESG’ was recognised by one in five investors (22 per cent) in Europe and a third (36 per cent) in Asia.

While the industry awaits the implementation of SDR, Nathalie Wallace, global head of sustainable investing at Natixis Investment Managers, cites the CFA Institute’s Global ESG Disclosure Standards for Investment Products – a set of voluntary standards for disclosing how an investment product considers ESG issues in its objectives, investment strategy and stewardship activities.

Wallace remarks: “Standards are emerging all over the place. They sometimes add a bit of confusion, but I think they are actually increasingly helping to really define the difference between ESG integration and ESG investments.”

According to the CFA Institute, it is “not uncommon to see the same term referring to different ESG approaches or types of investment products, or to see different terms referring to the same ESG approach or type of investment products. The confluence of the aforementioned factors has resulted in an increase in greenwashing”.

The CFA Institute says ESG terminology is often a barrier to investors’ understanding of the ESG approaches used in an investment product, giving the example of investment managers at times using words with a commonly understood meaning but which have a specific meaning when used in the context of ESG investing.

Medlock at Royal Londonlikewise says confusion with terminology and the lack of an industry standard is a barrier for some advisers starting a client conversation around responsible investment, especially with clients who have not expressed a preference in responsible investing before.

“It’s difficult to be authentic if you don’t know how to label different approaches and subsequently probe at clients’ preferences. The lack of a labelling standard can cause a disconnect between what product manufacturers are producing and what advisers are recommending to their clients.”