As any adviser who has been paying more than a passing interest in sustainability disclosure requirements and the Financial Conduct Authority's labels regimen will be aware, the intention of the regulator is to publish its proposals in Q4 of this year (I know, we are in Q4 already).
What will be included, excluded, changed etc is of course impossible to predict, but one thing I think we can be certain of is that labels are coming.
The FCA is cognisant of the fact that every single piece of market research reaches the same conclusion: a large constituency of investors are bothered, to some extent, about where their money is invested.
One of the features the FCA has intended to include in their labels regime is the idea of unexpected holdings.
Whether this will make it into the final version I cannot predict, but it would be a huge disappointment if it were to be withdrawn, and for the most obvious reason – if fund mangers are required to explain this area with total transparency, then the likelihood of greenwashing diminishes enormously.
In simple terms, transparency trumps greenwash every time. Being forced to state that a climate change fund holds oil and gas companies does not mean that this is greenwash if context is provided, but without it, what other conclusion will an investor and their adviser draw?
There have been some interesting responses on the unexpected holdings front, my favourite (from an asset manager) being “they are not unexpected to us”.
The FCA's view is that an unexpected holding is one that a reasonable investor would not expect to find based upon the sustainability theme of the fund as indicated by the label, which, it could be argued, sounds fine.
The reasonable investor is a hypothetical investor, but the problem for me is that investors' expectations differ according to their motivation and beliefs, and as fund manufacturers cannot know what characteristics are drawing investors to their fund, it is unrealistic to assume that they are motivated by the same sustainability issue.
A simple solution
I believe that the solution is very simple; when a fund manager lists the holdings in their fund, they should not only show the company name, but also what the business does, and sustainability and ethical issues relating to each company.
This approach will guarantee that no adviser or client can complain that they did not know either a company’s activities due to unfamiliarity, or possible concerns due to ignorance.
Asset managers must surely know all of this information for their own purposes, and they should therefore share that knowledge with advisers and investors.
Clients motivated by sustainability issues believe this issue must be considered alongside financial and risk considerations, so they will not be unhappy.
For fund managers it is the perfect opportunity both to differentiate themselves from their competitors, but also to be proud of the companies into which they invest, and to make the case for why they have been included.
