Given the seriousness of the many environmental and the social challenges we face, and the fact we are struggling to ‘keep +1.5 degrees alive’, I find it surprising that some in the investment community appear to think most funds that mention ESG or responsible ownership should qualify for a sustainability label.
I don’t think they should. Such activities are business-as-usual now and collectively investors are clearly not doing all they can to address sustainability risks.
There are of course some wonderful funds and fund managers – and the growth in ESG integration and responsible ownership activity is welcome. And this has done some good. Indeed, I’d argue that the ‘anti-woke’ backlash is an indicator of success.
However, the bigger picture is gloomy, so investors need to do a great deal more if we are to deliver the greener, fairer and more sustainable future so many clients want.
No individual investment approach is wrong per se, but whether or not a fund is working to reshape the future matters greatly to people who understand sustainability, hence the need for better disclosure and labels.
The Financial Conduct Authority (FCA)’s Sustainability Disclosure Requirements (SDR) labelling proposals are centred around helping clients find such funds. They are looking to raise the bar, whilst supporting diversity and innovation. The proposed labels are likely to allow funds to focus on environmental issues, social issues, or both. There is no requirement for funds to be all things to all people.
The three labels, as they stand, offer the option for managers to focus primarily on selecting assets that meet the fund’s published sustainability criteria (‘Sustainable Focus’ label), on real world positive impacts delivered by solutions companies (‘Impact’ label), or engaging with laggards – and others – as if our future depend on it (the ‘Improver’ label). These strategies will overlap of course extent – the FCA knows that – but making the funds core purpose clear could not be more important.
Labelled funds will also need to prove they do as they claim – with sustainability objectives, actions and published materials all pointing towards the delivery of a sustainable future.
If you know this area well, you will recognise this combination of options leaves the door open for a vast range of fund strategies. However, there are legitimate concerns about the proposals as they stand. Where the regulator lands on some issues, such as the proposed percentage of unscreened assets for portfolios, could make a big difference. Issues of this kind are important and are still being worked through, but assuming the FCA listens to feedback, as I know the team looking at this is, it seems likely to me that most funds that want to adopt sustainability labels should be able to do so.
Will every fund that is currently talking about ESG and sustainability adopt a label? I hope they do, believe they can, but doubt they all will.
Some may think the bar has been set too high and be put off. Others may say that the rules not intended for ‘funds like ours’.
The well-known business principle of ‘where there’s a will there’s a way’ will prevail. None of the requirements are rocket science, but they do require a real understanding of and a commitment to sustainability.
Some managers will need more support than others – and may find the process difficult – but that is in many ways the point. Right now, the system we operate in is driving us over a cliff edge and changing that will not be easy. However, it will be hugely worthwhile.
My suggestion to any asset management group that is finding this challenging is to look more closely at who they employ. In my experience, most companies employ people who are hiding their light under a bushel because their views don’t chime with their employer’s current mood music. Now would be a good time to go looking those people. They will understand the problem – which is by far the most important element of this equation.
It is also likely that some managers will want to stick with only doing ESG integration and basic stewardship activity. That is fine, providing no one is being misled.
The new rules won’t come in overnight; Fund managers, portfolio managers and their distributors still have plenty of time to think – and strategise.
Fund strategies that are built around concepts like ESG, tilting and responsible ownership – or are led by benchmarks and indices – are likely to find this process harder than most as they currently occupy the middle ground. These are around half of the primary funds on our Fund EcoMarket tool. Most of these funds will be able to use the ‘Improver’ label if the managers choose to go the extra mile and sharpen their focus on sustainability.
Leadership teams will have to decide which way to jump. Will they absorb potential greenwash criticisms and watch funds flow elsewhere (as we are already starting to see) – or will they take the bull by the horns?
I know what I want to see. If we are to turn the tide on existential threats like climate change and nature loss, we must work together.
Wealth managers and advisers – now may be a good time to start asking questions.