Let’s start by being brutally honest, if untrendy. The planet does not care what we call companies that emit carbon, destroy rainforests or fuel inequalities, or how we classify them in funds. Names do not change the weather, wipe out species, start or end wars or famines.
The problem however is that investors do care what things are called. And investors matter.
Major investors need to be able to properly understand and analyse what companies do and how they operate. And as the importance of such things has grown investor language has needed to become more sophisticated and nuanced. By contrast however individual investors – who mostly do not spend their lives thinking about investments – are baffled by lots of different new terms, which they often see as jargon.
I’ve been involved in this area – variously known as sustainable, responsible, ESG, impact or ethical investment – for nearly 30 years now and have a somewhat conflicted view on names and labelling conventions. I know words are both deeply irrelevant and hugely important. I also know – as David Attenborough’s most recent book beautifully describes – baselines shift, meaning what is widely accepted today will soon be seen as either too weak or too strong. Most probably the latter.
The small business I run has been grappling with this for a long while. We have classified retail ‘sustainable’ and ‘responsible’ investment funds (that I have always called ‘SRI’ as I believe sustainability and responsibility are the cornerstones of this area) for 11 years.
In order to keep the number of classifications manageable for the retail market (mostly IFAs and their clients) we have had to make compromises. ESG risk management and stewardship strategies as well as levels of intentionality and additionality vary within and between our eight core ‘SRI Styles’.
Our classifications have also shifted over time. We once split ethical funds into two groups – when they were the dominant force in this market. They now have only one. We once separated broad ‘environmentally focused’ options from ‘clean tech’ options. They are now together, labelled ‘Environmentally themed’. And until recently we had all sustainability focused funds in a single category – whereas now they are in two groups: ‘Sustainability themed’ (for funds that are more solutions focused), and ‘Sustainability tilt’ for funds that are underweight in polluters (but do not necessarily exclude them) and may rely more on stewardship.
What the regulator is doing
In November the Financial Conduct Authority published its ‘Sustainability Disclosure Requirements and investment labels’ discussion paper DP21/4. This paper builds on its July ‘Dear Chair’ letter, which spelled out expectations for the ‘design, delivery and disclosure’ of ‘funds that focus on ESG and sustainability issues’, the government’s green finance roadmap (October 2021) and the government’s wider climate aims, which include wanting the UK to be ‘the world’s first net-zero financial centre’.
So investors must rightly focus on both ‘real-world’ issues and how funds communicate what they do. We need terminology that allow for intelligent, detailed analysis among investment researchers and labels that help individual end investors easily navigate towards options that reflect their own opinions. Both require extreme care and pragmatism. But at the same time, we need to be rather more humble. All the fine words, research and analysis in the world will not save a single tree. Only action will.
Funds that neither pack a punch by financing solutions or encouraging real change do not need to be blackballed (for the time being), but they do need to be labelled carefully, and encouraged to up their game.
We have a system that includes labels such as ‘Limited Exclusions’ for funds that are more entry level, or newer to this area, and use the label ‘Unclassified’ for funds where we cannot really make sense of what they do. I’d be comfortable for the regulator to do similarly.
Investors need to be more precise in the language they use with one another and closer to plain English with retail clients. This will help send unambiguous and specific signals to investee companies and build trust among individual investors so that capital can flow as it must. Direct positive impacts will remain difficult for individual investment managers to attribute to their own activities. However, our collective success or failure will be plain to see, through whether or not we managed to halt climate change, deforestation and, or poverty.
