PAINTING IT GREEN: TIME TO TAKE ACTION ON SUSTAINABILITY

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23 August 2022

What are you doing to be more sustainable?

In more reflective moments, this might be a question you ask yourself. It is certainly one an increasing number of investors are asking of advisers and one the UK government is demanding the financial industry addresses as a whole.

Sustainable, or ESG (environmental, social and governance) investing, is not a new concept. It has had many incarnations over the years. You may remember the ‘ethical investor’ tick boxes on client fact finds or more recently, your focus may have shifted towards climate, the environment and the role finance can play in supporting the transition to a net zero economy.

Whatever you think personally about this type of investing, there is no disputing it is more than just a fad and advisers need to be prepared.

Sustainability or ESG?

Whilst ESG and sustainable investing share the same concepts and the two terms are often interchangeable, there is one very subtle difference. Perception.

Sustainable investing can mean different things to different people, whereas ESG has very specific criteria that companies can measure and report against.

The data driven nature of ESG investing offers more than just green credentials. Research from the European Securities and Markets Authority in April this year suggests that funds with an ESG strategy can provide better value, as they outperformed their non-ESG peers and were, on average, cheaper.

Greenwashing

Increased consumer awareness and a strong legislative drive to be more sustainable means questions have been raised about the integrity of some of the ‘green’ claims made by financial firms.

Greenwashing is characterised as conveying a false impression that products are environmentally sound, when there aren’t any facts or figures to back up those assertions. The International Consumer Protection Enforcement Network found recently that 40% of 500 websites analysed made potentially misleading environmentally friendly claims.

Regulatory disclosures

Without better disclosures and a clear product classification and labelling system, the FCA believes that the rising demand for ESG investments could lead to consumer harm.

At the end of 2021, the regulator set out its initial proposals for a Sustainable Disclosure Requirement (SDR) and Investment Labelling framework. Its aim is to help both consumers and institutional investors make informed decisions.

• Sustainable Disclosure Requirements: Firms will be expected to report on their sustainability risks, opportunities and impacts. The initial disclosures will be aimed at helping retail investors make considered choices. The intention is for these disclosures to be distributed alongside existing documentation, for example, KID.
• Investment Labelling: Certain products will be required to display their sustainability characteristics. This will be based on an agreed standard, allowing consumers to compare and contrast providers. The following labels have been proposed:
  • Sustainable: Products carrying this label must pursue specific sustainable characteristics, themes or objectives, as well as delivering a financial return.
  • Responsible: This could denote that an investment manager has considered sustainability risks as part of the investment process and risk management of a product. However, it has no specific ESG goals.
  • Not promoted as sustainable: A product under this category would not have any sustainability-related criteria, even as part of risk management. This label would be given to products that have a specific investment strategy or track an index, but have not prioritised sustainability.

At the time of writing, the consultation paper addressing feedback on these proposals had been delayed until September.

Why does this affect you?

Almost two thirds of participants in the FCA’s 2020 Financial Lives Survey admitted they worried about the state of the world and felt personally responsible for making a difference. These beliefs are already influencing people’s investment decisions.

In May this year, the Investment Association reported £1.2 billion of inflows into responsible funds, taking the total under management to £86 billion.

Quite simply, if you are not considering sustainability, you risk alienating an increasing proportion of potential investors who want more than to simply make a profit.

Take action now

Whilst the FCA has sustainability on its regulatory radar, that’s no help when a client asks you about ESG investing now.

If you would like to discuss how sustainability requirements might affect your business, or you want advice on preparing for SDR, don’t hesitate to contact us. Telephone (0161) 979 0726 or email: info@b-compliant.co.uk