For those of us working in sustainability, the negative rhetoric of the past few months hasn’t been easy to ignore. Driven in large part by the changing political environment in the US, a whole spectrum of issues that had previously enjoyed near-unanimous consensus have become more divisive than we could possibly have imagined just a few years ago.
This increasing polarisation, combined with an onslaught of new regulation and performance headwinds, has led a number of companies to soften their stance towards sustainability, if not step away from the topic all together.
Unsurprisingly, this trend has also been reflected in the sustainable fund landscape. Over the past 12 months we have seen a whole host of funds close or re-brand away from sustainability. Indeed, according to Morningstar, 2024 was the first year that sustainable fund closures outpaced sustainable fund launches – a trend that looks set to continue in 2025.
Also read: Sustainable funds suffer worst quarter of outflows on record
While on the face of it this paints a fairly bleak picture for advocates of sustainable investment, we would contend that what we’re now seeing is actually a correction much needed by the industry – in which we must take one step back in order to take two steps forward.
A correction in the funds market
There can be no doubt that the proliferation of sustainable funds in 2020/2021 caused a significant degree of confusion and – although in some cases unintentional – a concerning amount of greenwashing.
A good deal of this confusion has stemmed from a clear lack of consensus around definitions, specifically a conflation between ESG funds (ie those which consider sustainability issues only when material financially) and sustainable funds (ie those which actively pursue positive outcomes for people and planet). This led to some clients buying products marketed under the banner of sustainability that, in reality, looked no different from mainstream funds, harming trust in the industry.
It is this conflict that the new regulatory rules in the UK and Europe have rightly sought to address. Although it is still early days, the rules have made clear progress in bringing much-needed clarity to the market, setting a higher bar for sustainability. The fact that the introduction of these rules has directly coincided with a broader polarisation on sustainability issues has further accelerated this trend, with only those truly committed to sustainability choosing to “opt in” or “stay the course”.
This is an important correction, and while many are bemoaning what looks like a retrenchment or step back from sustainability, there is no doubt that the naming and marketing of sustainable funds today is already far more reflective of how the assets therein are actually invested – undoubtedly a positive for clients.
While the successful implementation of these regimes clearly has some way to go– including ensuring a meaningful uptake of labels and choice for consumers – we believe they will set down the strong foundation of quality and trust which is essential to the future growth of the sustainable fund industry.
Divergence is creating clarity at a corporate level
Although much of the industry focus to date has been on the re-naming and re-branding of funds, it is worth also looking at the impact these regulations are having at a firm level.
Over the past few years, we had all been moving in the same direction on sustainability as an industry, with the vast majority of asset managers signing up to the same initiatives and making very similar claims. Viewed optimistically, it was good to see support for these important issues, but the unfortunate reality is that in a number of cases these claims were made irrespective of how a firm’s assets were actually invested.
Today, not only do new anti-greenwashing regulations limit what claims can be made about sustainability, but, perhaps even more significantly, it is no longer possible to please everyone with sweeping but generic sustainability “commitments”. Areas such as climate and diversity – in which claims like these were in the past welcomed or indeed encouraged by all clients have now become much more divisive.
Over the past few months we’ve seen a host of asset managers step back from previous commitments – the most high profile example this year being the exists from and subsequent review of the Net Zero Asset Managers Initiative – softening their language on sustainability as a consequence, and in so doing clearly indicating their future direction of travel.
A much-needed re-set
While at first glance this trend might seem to signal a worrying trajectory for the industry, we believe it instead represents a much-needed reset that reflects a more realistic picture of a diverse industry. Divergence will create clarity, and it can only be a good thing for our clients if, as an industry, we are required to be more honest about what we stand for as an organisation.
The demand for truly sustainable investment has not disappeared overnight; what has been lacking is trust that it can genuinely be delivered in a transparent and credible way. By taking what might look like a step back as an industry – reducing the number of funds, clarifying our corporate commitments and eliminating greenwashing, we can create a real pivot point from which we can take two steps forward, rebuilding credibility and trust in the sustainable funds market and setting down solid foundations from which to grow back stronger than ever before.
