Written by Julia Dreblow, founder, SRI Services and Fund EcoMarket
I’m going to guess that you may not have heard of the British Standards Institution’s (BSI) PAS 7342, the new British standard specification for retail sustainable investment funds.
This newly published, publicly available document is a project I became involved in around six years ago while stressing about the direction the sustainable, responsible and ESG investment space was heading, and how certain elements were clearly sowing the seeds for future criticism and complaints.
When I took over as the technical author of the PAS in 2021, I inherited half a dozen bullet points and a great advisory committee that I had previously been part of. The project was being funded in part by industry (Royal London, Impax, IG Group, Guernsey Finance and Lloyds bank), with the rest financed by the Department for Business, Energy & Industrial Strategy, now the Department for Energy Security and Net Zero – a combination that made sense given the subject matter and challenges we face.
The need for standards in this area had been conceived long before the Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR), and the standard’s draft content shifted significantly over time, but it always retained its purpose to set out what ‘good’ looks like for funds that focus on sustainability.
The title shifted occasionally, too. We settled on ‘Sustainable Investment funds – Design, implementation, monitoring and communication of sustainability attributes – specification’, as we worked through the real-world challenges fund managers face in this area. The term ‘sustainable’ is not, however, used in quite the same way as SDR, as the paper extends beyond the scope of labelled funds.
Further, the content and vocabulary shifted as SDR evolved. Terms such as ‘aims’ were largely replaced by ‘objectives’ – and ‘metrics’ and ‘KPIs’ increased in prominence. However, the need to have clearly documented policies that outline ‘issues’ and ‘approaches’ remained. These are the building blocks of any sustainability strategy, whether a fund has screens, themes or focuses on a single issue or metric.
The paper also makes it clear that this area is complex and imperfect, and that trade-offs are common. Even the best processes won’t stop unpredictable things from happening. It also talks about the need to marry financial and sustainability characteristics.
There is also a significant focus on areas such as governance and resources, with recommendations about how any policy or strategy breaches should be dealt with, again in recognition of real-world imperfections.
PAS 7342 also references ethical issues, saying they must be treated with equal professionalism to sustainability issues, in part because we were mindful that is what clients deserve, but also because this is what ‘good’ already looks like for many funds with strong sustainability strategies.
The appendix includes an ‘issues/approaches policy summary’ table for fund managers to consider using. The purpose of this is to aid client clarity and to avoid fuelling misunderstanding with industry jargon.
So, how relevant is this now, given what else is going on? In my view – very. We are all concerned about political events, but it doesn’t diminish the seriousness of the climate and nature crises we face, the effects these are increasingly having on people, and what they mean for investors. The need to allocate capital responsibly, with a clear and well-explained focus on sustainability, remains vital.
But most of all, in a world where trust is at a premium, we need foundations in place that describe what is expected of fund managers, to help them as well as intermediaries and clients. By describing ‘good’, we have sought to banish some of the problems that helped fuel an utterly predictable ESG backlash. Having the BSI bring together a group of industry experts, fund managers and government departments to work this through seemed like a good idea in 2021, and feels even more important today.
I hope that the publication of this document, which can be downloaded from the BSI website, will help sustainable investors navigate the new rules more easily and help us to build back better and stronger than ever before.
