They have to be able to trust the information they use to select investments.
This is particularly important when it comes to environmental, social and governance disclosures and labelling – an area in which I believe the financial services industry can learn some important lessons from consumer products.
Let’s think about chocolate – always a pleasurable thing to do. This is a market where the consumer is faced with a bewildering array of products, regular new entrants and long-time favourites.
Brand and taste are important but increasingly consumers want to know more about the provenance of the product they are buying. Labelling is critical, and importantly labelling that the consumer can trust. With chocolate this appeared in the form of the Fairtrade mark. This label gives consumers confidence that the product has been manufactured in an ethical manner, workers’ rights respected, raw materials sourced responsibly and so on. Not all products bear this mark and its use is prized, enabling consumers who are concerned about ethical issues to make an informed choice when faced with shelves of competing products.
Apply that now to financial services and ESG in particular. If everyone jumps on the bandwagon and claims to be sustainable – which can mean many different things to different people – then this greenwashing does nothing to serve the end investor or to help overcome the choice dilemma. It is therefore important that, learning from the retail sector, a number of factors are considered.
Labels are very good at assisting investor (consumer) choice. They must be trusted and for that there must be oversight and clear definition of what is required to attain that label. They should be relatively hard to get so that they are meaningful for those who achieve the required standards and mean something to the users, enabling real differentiation between the choices on offer. The labels should also be available to all products within a market.
So the Financial Conduct Authority’s consultation on sustainable labelling for the funds sector is undoubtedly welcome in helping bring some of this discipline to financial services. Oversight and governance are critical. We would argue strongly that all collective investments should be in scope, so closed-ended investment companies should be included as well as open-ended funds. This will help increase investor confidence and comparability.
The hurdle to attain a label should be high such that it is a prized asset reflecting real and meaningful contribution to the stated aims, for example combatting climate change. ESG is currently often boiled down to the E but S and G should not be forgotten, and for closed-ended vehicles in particular the ability to hold social purpose assets, for example investments in social housing, should be equally deserving of a label to help investors identify these funds, albeit one differentiated from the E labelling.
Returning to chocolate briefly, taste clearly remains important to consumers and more products are on sale without the Fairtrade label than with it. If done properly, the same will likely apply to the investment sector. Our recent research showed that 65 per cent of investors consider ESG when choosing investments, but it also demonstrated that across all investors, performance is still the top priority.
Just as investors can easily compare the performance of funds, they should also be able to compare their ESG characteristics. Clear and trusted labelling, with high hurdles and oversight driving consumer confidence, could really help investors overcome the choice dilemma and find those investments that meet their desired objectives.
If every investment product can, to whatever extent, claim to be ESG the label will be devalued and meaningless. It will be more like a chocolate teapot than a Fairtrade chocolate bar, and will do little to help investors with the choice dilemma. The financial services sector will have missed an opportunity to really help its customers.
Richard Stone is chief executive of the Association of Investment Companies