The labelling of sustainable funds looks set to become high profile very soon, once the Financial Conduct Authority has finished working through the responses to their discussion paper DP21/4.
The paper was good, but some parts will need further thought – and like others I have fed in my opinions.
I first became interested in the similarities and differences between sustainable, responsible and ethical funds in 1996, when I moved from what was then NPI to Friends Provident. It was immediately clear to me that the NPI Global Care funds (now the Janus Henderson range) focused more on sustainability, whereas the Friends’ Stewardship fund range (now Aviva) focused more on people.
The strategies were similar. Both catered for "investors who care", but they had slightly different intended audiences.
It was not until I was running the sustainable and responsible investment side at Friends Provident a few years later, when ‘open architecture’ arrived, that I set about bringing different funds onto the Friends’ platform so that we could cater for the widest possible range of client interests.
However, during a meeting with Geoff Mills of RSMR in 2009, after I had left Friends, I realised the fund diversity I found so interesting was not exactly everybody’s cup of tea.
We talked about how useful it would be to put funds into different buckets, with simple labels, so they could be explained to clients more easily. That conversation was the genesis of the SRI Styles on our Fund EcoMarket tool, which launched in 2011.
Much has changed since then. Climate change has become far more evident and scarier, and sustainable investment is now seen as a major investment opportunity.
Given these shifts it has become all the more important sustainable investments are both understandable and trustworthy, which is why I am genuinely delighted the FCA published their sustainability disclosure requirements discussion paper in November.
The paper builds on their excellent ‘Dear Chair’ letter and guiding principles, published last July. The letter set out the regulator’s stance for the "design, delivery and disclosure" of sustainable funds. It also sits alongside numerous related developments, notably increased climate change related, entity level, reporting requirements, which should improve data quality.
DP21/4 is however different as it emphasises clients’ needs.
Starting with disclosures, the paper proposes two tiers of information: a basic level for end clients and more extensive tier for institutional clients. I doubt this will be contentious, although I believe advisers and their clients should have access to all relevant information. Cherry picking access to information can only fuel greenwash fears.
The paper also proposes environmental, social and governance fact sheets. It may be semantics, but the word ‘fact sheet’ bothers me. My preference would be for the regulator to focus on mapping out disclosure requirements, not presentation.
With regard to content, I would suggest leading with the issues a fund focuses on, and mapping them against how it approaches them. Putting these into a simple table – perhaps plotting 'environmental', 'social' and 'sustainable' as columns, and 'avoid', 'invest' and 'influence' in rows (note the use of plain English) should not be hard. The initial text could be a client friendly overview. Information about policies, metrics, methodologies, indices, affiliations and so on would follow.