Trust is precious: hard to gain, easily lost. In its eagerness to jump on an ESG bandwagon, the investment industry lost investors’ trust when it comes to sustainability. But in the latest findings of our ESG Attitudes Tracker, there’s a sliver of hope we might win some of that trust back.
Put simply, things are bad, but not getting worse. Two-thirds of private investors are concerned about greenwashing – the same as last year. The proportion of investors who are not convinced by ESG claims from funds, having peaked at 63% last year, has dipped to 61%. And among those who don’t consider ESG when investing, 44% say it’s because they’re not convinced by asset managers’ ESG claims, down from 51% last year.
Among intermediaries (advisers and wealth managers), there is a similar trend, with 17% of respondents trusting ESG claims – low enough you might say, but better than 12% last year. Trust increases once the adviser or wealth manager has three years’ experience in ESG investing.
People are still sceptical, but no longer quite so frustrated. Greenwashing is priced in. One private investor told us: “I would assume every company is greenwashing to promote themselves… So I’m not concerned about it, but I feel like it’s probably very common practice.”
Even if sentiment has stabilised, it would be bold to conclude from these findings that things are improving. So what can be done to disperse the clouds hanging over ESG?
Enter the regulator
The Financial Conduct Authority (FCA) hopes that its new disclosure requirements and labels will shed light on what is currently a murky picture. Investors seem receptive, with around two-thirds of both private investors and intermediaries saying that labels would increase their trust in sustainability claims.
Among intermediaries, the Sustainability Focus label is the most likely to be used for screening (by 54% of respondents), followed by Sustainability Impact (52%) and Sustainability Improvers (45%). Sustainability Mixed Goals – a late addition to the FCA’s framework following industry feedback – is the least likely to be used (37%).
However, this is all hypothetical at the moment, with few labelled funds currently available. Our in-depth conversations with intermediaries as part of this research show that questions remain about how the labels will work in practice.
Though advisers and wealth managers welcome the idea of “standardisation” – something they have cried out for in previous waves of the ESG Attitudes Tracker – they feel that success will hinge on the labels being widely adopted. “My concern will be whether there are enough companies that can make a diversified portfolio, or whether that’s too limiting,” one wealth manager told us.
The same respondent pointed out that the labels currently only apply to UK-based funds – which is unhelpful given that some of the products they use are based in Ireland. (The same problem applies to Guernsey and Jersey investment companies investing in renewable energy infrastructure, of which there are several.)
There remains a feeling that there is something subjective about sustainability, and one client’s requirements will differ from another’s. If the labels are too narrowly defined, this could fail to take such nuances into account.
Admittedly, the labelling regime is barely established, and some of these concerns may dissipate once it gathers momentum – for example, if we see a critical mass of funds adopt labels, and once the regime is expanded to funds based outside the UK. Some concerns may also be based on misperceptions of the regime – not everyone has studied it in detail.
Look beyond the labels
I’m sure everyone reading this hopes that labelling (and SDR more broadly) is just the ticket to restore some of that lost confidence. But our research shows that following regulations is likely to be just the start of the journey when it comes to convincing investors of your sustainability credentials.
One adviser exhorts funds to “be clear about what it is you’re trying to do and how you’re doing it”. They continue: “I personally love micro detail. So why you’re holding this company, what you’re trying to do in order to better it and why it makes sense as an investment”.
Our respondents’ wishlist includes case studies that clearly illustrate a fund’s philosophy and objectives; benchmarking against peers; detail on underlying assets, especially ones likely to be less familiar; independent ratings and reviews; historical performance and progress; thought pieces explaining a fund’s rationale; and active, well informed sales teams who can explain the investment case as well as the sustainability credentials.
All of this clearly goes beyond regulatory requirements, which can support trust but never inspire it.
