Will investors understand fund industry's new ethical language?

by Jemma Jackson from interactive investor |

New industry-wide definitions have been designed to clarify the complexities of sustainable and responsible investment.

 

It was no easy task getting an entire investment management industry to agree on a common framework to help navigate the complex world of responsible investment, so what's the verdict? interactive investor shares some headline thoughts.

Moira O'Neill, Head of Personal Finance, interactive investor, says: "It's never easy reaching a common consensus, least of all when it comes to ethical investment, so this is an important milestone. But whilst there have been a few steps forward, there have also been some steps back too. 

"Whilst we welcome the principle of having three components to the responsible investment framework, the new common language being spoken has evolved little from where we are today - many investors will be unable to speak it. Words like 'positive tilt', 'sustainability themed', 'private impact investing', 'SDG Funds' and 'norms' are classic ethical alphabet soup – albeit sustainably sourced. Our own ethical investing long-list breaks funds into three categories - 'Avoids, Considers, Embraces' – an approach deliberately designed to be consumer friendly.

"The idea of having a 'firm level', as well as 'fund level' framework is really interesting, but in some ways gives investors additional scope for confusion. We are a long way from seeing the whole industry incorporating ethical principles into their wider business. If it makes investors feel they need to start doing operational due diligence as well as due diligence at the funds level, it may make ethical investing seem even more overwhelming than it already is.

"Finally, next year IA members will also be asked to identify which funds should be classified as having responsible investment characteristics to help bring further clarity to this market, and this will inform the IA statistics. We would have liked to see an independent body making calls on how rigorous an ethical policy is, rather than leaving it to the managers."

Rebecca O'Keeffe, Head of Investment, interactive investor, adds: "The IA's attempts to come up with a framework for common language within the ethical investing world is to be welcomed – however, it cannot solve the inherent tension within the industry as to what makes an ethical stock and it does not address the problem of the huge subjectivity that surrounds ethical investing.

"One of the big problems that affects all attempts to identify ethical funds into broad generic categories is that they cannot differentiate between shades of green within individual groupings. For example, having an 'exclusions' category is obvious and is fairly common across the industry. However, it doesn't discriminate between those funds that screen out two thirds of sectors and stocks, versus those that have a more nominal approach and screen out less than 5% of investments."

The Responsible Investment Framework definitions:

Stewardship: "Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society."

ESG integration: "The systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions." This does not prohibit any investments. An ESG strategy could invest in any business as long as the ESG risks involved are taken into account.

Exclusions: "Exclusions prohibit certain investments from a firm, fund or portfolio. Exclusions may be applied on a variety of issues, including to align with client expectations." They may be applied at the level of sector; business activity, products or revenue stream; a company; or jurisdictions/countries. 

Sustainability focus: "Investment approaches that select and include investments on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcome(s). Investments are chosen on the basis of their economic activities (what they produce/what services they deliver) and on their business conduct (how they deliver their products and services)."

Impact investing: "Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return." These might be social bond funds, or investments focused directly on unlisted projects or initiatives.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article. 

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