25 January 2023
As an asset manager our aim is to deliver strong, sustainable risk adjusted-returns to our clients in a way that aligns with their values and furthers their mission or helps them achieve their financial objective and security. We believe that this requires us to be an ‘agent for positive change’ as investment markets can only ever be as healthy as the environment and communities that support them.
However, despite the ever-growing attention on environmental, social and governance (ESG) factors, we do not feel that the investment management industry has truly understood that the only way to manage these risks is to go beyond the make-up of our portfolios and make a lasting real-world impact. The purpose of sustainable finance is to make the world a better place and not simply to mitigate ESG risk.
For this reason, we support the Financial Conduct Authority’s (FCA) definition of a sustainable finance product as being one that ‘plausibly achieve(s) or encourage(s) positive sustainability outcomes’, and the attempt to limit the use of sustainable finance labels to products that can achieve positive ‘real-world’ impacts.
We strongly believe that investors will benefit from further clarity about the ‘purpose’ of sustainable finance and that the proposed labelling regime has the potential to increase the effectiveness of sustainable finance in building a better world. However, we would welcome clarity as to how pooled multi-asset investment funds could qualify for a label. Given the requirements of the underlying investors, multi-asset pooled fund solutions are a substantial part of the church and charity sector.
In addition, as organisations that exist to drive positive change, using their investment assets to further their mission is a key priority for many churches and charities. However, as charity trustees are often part time, unremunerated, and are not drawn from a financial services background, many find it difficult to differentiate between the different ‘sustainable’ products that are on offer. As a consequence, it would be disappointing if the labelling regime was not able to be extended to this key product type as the sector would benefit from the clarity the proposed SDR regime offers.
In the interest of keeping our response concise we are focussing our response on a selection of the questions and topics raised.
Our key views can be summarised as follows:
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We support the FCA’s intention to introduce sustainable finance labels. We believe that this will serve to reduce ‘greenwashing’ and remove some of the complexity that is inherent within the current sustainable finance industry.
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We also strongly support the intention to only allow labels for funds that can ‘plausibly achieve or encourage positive sustainability outcomes.’ When properly targeted, the sustainable investment industry can play a key role in building a better world. We also agree with the findings of the consumer research undertaken by the FCA whereby the majority of consumers of sustainable investment products expect their funds to have a positive impact. However, we believe that the impact of the industry has been held back by ‘greenwashing’ and agree that the current market structure can be confusing for underlying investors. We are, therefore, confident that the proposed labelling regime has the potential to reduce complexity for consumers and to increase the impact of sustainable investment.
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We support the proposed focus on ‘additionality’ within the consultation document. We believe that asset managers’ approach to sustainability should be judged on the additional social or environmental impact that they, directly, intend to create (through, for example, active ownership or the provision of capital). This is in opposition to the currently dominant approach that predominantly relies upon reporting the impact that is delivered by companies held within portfolios. We believe that a focus on additionality will further incentivise the development of impactful sustainable finance and meet the requirements of underlying investors to ‘do good’ with their money.
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We welcome the proposed three sustainable fund labels, ‘sustainable focus’, ‘sustainable impact’, and ‘sustainable improvers’. We support the inclusion of ‘sustainable improvers’ within the labelling regime. We believe that encouraging improvements in company behaviour through active ownership is the most effective way that asset managers can have a direct impact towards building a more sustainable world. Many sustainable investment activities treat the world as we want it to be, rather than seek to improve the world as it is. Therefore, we believe that recognising targeted and meaningful active ownership activities with companies that need to change as being a sustainable investment strategy is key to building a more impactful sustainable investment industry.
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We believe that sustainable finance should be delivered by the firm, not just the fund. We believe that consistency is key when it comes to delivering positive ‘real-world’ impact through sustainable investment finance. For this reason, we support the focus on the ‘entity’ as well as the fund within the proposed labelling regime.
However, we encourage the FCA to consider precluding asset managers from labelling any product as sustainable if they operate alternative strategies that have the potential to negate – either in full, or in part – the positive impact of their sustainable funds. This is particularly important for firms looking to label a fund as ‘sustainable improvers’. In our experience, effective engagement needs to be led centrally by a unified position. Progress can be undermined by the operation of strategies with contrasting approaches to active ownership. If companies get contradictory votes and engagement asks from the same asset manager, it is highly likely to undermine the ability of the ‘sustainable improvers’ fund to achieve the intended sustainability outcomes. We therefore believe that the ‘sustainable improver’ category needs to be reserved for funds that are managed by asset managers with a consistent, positive, active ownership strategy. -
We encourage the FCA to incentivise activities that tackle ‘systemic’ sustainability risks. We believe that, due to the structure of the industry, the majority of asset managers – particularly those that operate ‘active’ funds – are not incentivised to treat ESG risks as being systematic and thus tackle them accordingly. This is because work to improve standards of the market can have the impact of improving collective performance, rather than that of the specific companies held within the portfolio. We are concerned that the proposed approach to assessing a fund as ‘sustainable improver’ could further disincentivise ‘systemic action’ and encourage limiting sustainability approaches to the level of individual holdings.
For this reason, we encourage the FCA to directly incentivise a more systematic approach to sustainable improvers. We believe that this could be conducted in two ways:-
The FCA could consider a ‘sustainable improver’ label to the asset manager, as opposed to/in addition to the current proposed ‘fund level approach’.
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The FCA could allow asset managers to include ‘impact’ that an asset manager has delivered at companies, beyond those that are directly held within the portfolio, as being a rationale for labelling a fund as ‘sustainable improver’.
Such an approach would be consistent with the FRC’s Stewardship Code. This requires signatories to disclose the activities that they have undertaken to promote a ‘well-functioning financial system’ not just an improving portfolio.
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We welcome the flexibility to reporting that is set out under the proposed regime. We welcome that the metrics to disclose are not fixed and agree that this approach will leave room to adapt to international standards and developments coming out of the ISSB, and will prevent prescribing metrics which ultimately will have to change in due course. In addition, many collaborative engagement programmes have already shared benchmarks and engagement objectives which evolve and develop over time (e.g. Transition Pathway Initiative and Climate Action 100+). We also believe that this can incentivise innovative behaviour. For example, CCLA has worked with expert partners to create the CCLA Corporate Mental Health Benchmark. This assesses companies’ approach to protecting the mental health of their employees and, despite only being launched in 2022, has already led to improvements in company policy and practice. This impact would not be possible under a regime that limits ‘sustainable impact’ to existing defined reporting standards.
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We would welcome further disclosure of potential labelling standards for multi-asset funds. We would welcome the FCA to set out further information as to how a multi-asset fund could achieve a ‘sustainable finance label’. Whilst we recognise that the intention is to not allow a fund to qualify for a label under multiple categories, we believe that different asset classes have different ways of achieving sustainable impact. For instance, an impactful multi-asset fund could adopt a ‘sustainable improver’ approach to listed equity investment and a ‘sustainable impact’ approach to alternatives through, for example, the provision of financing for renewable energy projects.
Multi-asset funds are often used by investors and financial advisers to achieve asset class diversification and simplify portfolio management. Retail investors will also want to achieve a diversity of approaches to sustainable investing. We are concerned that these funds may be discounted simply for not being able to achieve a label where they otherwise would be a suitable investment both from a financial perspective and in line with a client’s sustainability preferences and goals. As such, we believe that it is not in consumers’ interests for these funds to be ineligible for a label.