An industry-wide framework to provide a common language for ESG investments has been launched by the Investment Association (IA).
The framework follows concerns that investors are struggling to navigate the different approaches taken by investment managers to responsible investments.
The framework aims to provide clear product categorisation to help investors better access and compare funds with a focus on environmental or social outcomes.
Based on consultation with over 40 investment management firms, representing £5 trillion of assets, the framework reflects the wide range of responsible investment approaches, including commonly-used terms such as ESG integration, stewardship, impact investing, exclusions and sustainability focus.
Building on the Global Sustainable Investment Alliance (GSIA) definitions for sustainable investing, the IA’s framework seeks to avoid using potentially misleading language.
For example, a significant minority (36%) of firms voted to replace the term “sustainable” with “responsible” when referring to firm-level approaches that include ESG integration and stewardship.
Additionally, “responsible investment” was adopted as an appropriate term to encompass the full suite of approaches within the framework.
By contrast, “sustainability” is understood to refer to certain goals which responsible investment approaches can contribute.
“Sustainability could be used to refer to environmentally sustainable goals, socially sustainable goals or goals to do with economic sustainability, including the resilience of financial systems,” the framework’s guidelines state.
The IA is also exploring the creation of a UK retail product label, which would provide a shortcut for investors to identify whether an individual fund is adopting a responsible investment approach.
More than eight out of the 10 firms (85%) which responded to the industry consultation supported a fund-level label.
Providing clarity to investors was the top reason for establishing a label, with firms also keen to highlight the UK’s role as a global leader within sustainability and responsible investment.
“One significant barrier to the growth of responsible investment has been the lack of a common language and framework that describes and categorises these approaches and products,” Chris Cummings, chief executive of the IA, said. “Agreement of industry-wide definitions provides consumers with that much-needed clarity and choice.”
Victoria Hasler, director of research at Square Mile Investment Consulting and Research, said: “ESG and responsible investing will be of ever greater importance in the coming months and years, and a common language allowing all market participants to discuss the topic goes a long way to helping to cut through the confusion which currently abounds in the industry.”
The IA will seek member feedback on which funds have responsible investment characteristics early next year, and publish its results later in 2020.