It has taken a lot of effort from many parties to deliver the Sustainable Disclosure Requirements (SDR) and investment labels, but the hard work is just beginning.
Using an athletics analogy, SDR has set out the race track and told the athletes to choose their lanes. The anti-greenwashing rule has been added to check for doping and the starting gun has been fired. We don’t yet know how the race will unfold and how each individual runner will perform.
We all support the objective of “helping consumers navigate the market for sustainable investment products”. One of the quickest SDR wins in this regard is the exclusion of risk-focussed ESG funds from the labelled categories. This helps to address the industry’s serious failure to draw a clear line between strategies designed to serve good corporate outcomes and those investing for positive external impact. No-one is going to win the sustainability race if we can’t even put our running shoes on the right feet.
The role of the financial adviser is important here. The labels should make it easier for them to identify and compare sustainable investing strategies – solutions based positive selection, engagement and impact investing etcetera. However, there is no certainty that advisers will seek out funds with sustainable labels and several issues might dampen their enthusiasm.
One of these is the sheer weight of policy and scrutiny that the FCA is doling out at the moment – through the embedding of Consumer Duty, work on the Redress system and scrutiny of ongoing service and fee practices. The Adviser Sustainability Working Group is going to be dealing with a pretty fatigued bunch.
Furthermore, risk-based ESG is still going to look attractive to a lot of advice firms. Its greater focus on financial outcomes simply adheres more closely to the inherent beliefs many firms have in unfettered diversification, traditional risk management and minimal divergence from market returns. We may have four sustainability choices now, but non-sustainable and ESG haven’t gone away. If you simplify the range into three – non-sustainable, ESG and sustainable – then you see that ESG sits snugly in the middle of the pack. That’s often a popular place.
We also need to accept that regulation alone cannot capture the hearts and minds of either adviser or their client. Simplified and meaningful consumer-facing fact sheets are a wonderful tool, a highly effective way of helping to communicate the key features and benefits of the product. However, we need something else to help trigger a desire for that product in the first place.
This trigger could be a compelling answer to the question “how does sustainable investment actually make a difference? How is it going to solve all the problems that it highlights to us?” Advisers tell me this answer is what they need. It’s the key to making sustainable investment choices seem reasonable to the moderate majority of people who sit in-between those who happily maximise profit at any cost and those who prioritise environmental, social or moral motivations.
The FCA seemed to change its thinking somewhat on this subject as the SDR consultation developed, reducing the emphasis placed on “influencing the cost of capital” (not an easy concept to convey to the person on the street in any event). The definition of impact also changed, with a lot now depending on the articulation and delivery of “a theory of change”; also not a particularly user-friendly term for the consumer. The final runner is stewardship and engagement. The FCA and various industry participants are working to enhance the effectiveness of this and how well it is communicated, but it has some ground to catch up.
Advisers need clear and convincing messaging to share with clients about direct sustainable investment outcomes, a reason to let go of unfettered market access and the index safety-rail and to pay a little more for active management and engagement.
Every now and then a flash of clear cause and effect emerges. An investment manager stimulates corporate efforts to tackle mental health. A stewardship champion captures how engagement can enable the investor to pursue their specific environmental and social concerns in a way that stock selection cannot do. A discretionary fund manager puts its money where its mouth is and seeds a new fund, fostering innovation in the sustainable finance space. But you wade through a lot of dense language, misleading claims and conflicting views to unearth these golden nuggets.
I’d like to see the Sustainability Working Group for Advisers become a forum for a multi-party exchange of information between the investment industry, the advice profession and representatives of the public. Advisers certainly need help with better understanding and communication of sustainable finance. However, advisers and investors also need to guide investment managers about how they can improve their products and messaging.
There’s a huge amount riding on this relay race we are lined up for and each baton handover is key.
