Industry needs high-standard ESG labels to instil confidence

Richard Stone

Richard Stone

Winning investors’ trust in financial services is key. With thousands of funds out there, advisers and their clients are spoiled for choice.

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.