ESG: UK fund management body proposes standard definitions
The trade body representing UK asset managers has launched an industry-wide consultation on sustainability and responsible investment in a bid to bring more clarity to the growing area of activity.
The Investment Association (IA) is seeking its members’ views on proposals for industry-agreed definitions and a product labelling system for UK retail investors. It also asks managers about their disclosure practices.
According to the trade body, asset managers had been practising responsible investment “for many years” with the intention of delivering better long-term returns for clients, but expectations had evolved.
“More recently, a number of key drivers have emerged, drawing increasing attention to sustainable and responsible investment solutions that deliver on particular sustainability objectives alongside the generation of long-term returns,” it said.
According to Chris Cummings, the IA’s CEO, the asset management industry “is at a critical juncture in embracing sustainability as a defining feature of the investment landscape”.
He said: “With sustainability and responsible investment becoming an increasing priority for today’s investors, this consultation is an important step forward in gathering the views of the industry with the ultimate aim of bringing greater clarity to savers.
“As significant investors, it is our role to help today’s investors achieve both their financial as well as their environmental and social goals.”
The IA’s proposed “definitional framework” took as its starting point definitions given by the Global Sustainable Investment Alliance, the trade body explained.
The language was then “tweaked” in places, and the terminology “rearrang[ed] … in a framework which categorises approaches primarily by firm or fund level approach”.
Schematic of IA’s proposed ‘definitional framework’
Firm-level sustainable investment approaches, according to the IA’s proposal, “have as their objective the integration of environmental, social and corporate governance (ESG) criteria in the belief that they constitute sources of risk and return and that they contribute to the generation of sustainable returns for investors though long-term value creation”.
The IA added: “This is most commonly used across all asset classes as an enhancement to risk management processes.”
It identified stewardship – also referred to as active ownership – and ESG integration as types of firm-level approaches to sustainable investment.
The trade body identified and defined three approaches at the fund or mandate-level, saying they were “categorised by having an explicit sustainability objective (which can be non-financial) and will typically be marketed on this basis”.
The three approaches are:
- Negatively screened investment approaches, which could also be known as applying an exclusion policy or as ethical investing
- Positively managed investment approaches, such as thematic investing or best-in-class investing
- Impact investing
Asset managers may use a combination of approaches, the consultation document noted.
Questions about IA members’ disclosure practices are split into two sections to reflect two different frames of reference.
One is about how firms disclose how they have embedded ESG considerations into their investment process using long-term value creation as the frame of reference.
A second set of questions are about reporting in a way that, according to the IA, “seeks to communicate explicitly the impact an investment has on environmental and/or social sustainability” – for example, against one of the UN Sustainable Development Goals (SDGs).
“It can be helpful to think of asset management firms being on a journey to impact”
The trade body said that all investments would have some form of impact on society and the environment, and that it could be “helpful to think of asset management firms being on a journey to impact”.
It said: “Articulating the impacts of sustainable investment approaches, funds, mandates or products that are not impact investments is an important step on this journey.”
The IA has also proposed a label system to help retail investors make sense of the UK fund universe.
The consultation asks IA members if they agree that the UK retail market should be the target audience, and to set out their reasons and a possible alternative approach if they disagree.
Mirroring the proposed top-level split between firm and fund-level approaches in the IA’s definitional framework, the trade body has proposed there be two labels: one for those approaches targeting the generation of sustainable returns through long-term value creation, and another for those investment approaches with an explicit sustainability objective.
The IA’s consultation comes a year after the trade body identified sustainability and responsible investment as a dedicated policy area. It set up a sustainability and responsible investment committee, chaired by Mark Versey, CIO of real assets at Aviva Investors, to lead work in this area.
This was taking place “against a fast-moving and multi-faceted policy and regulatory backdrop”, according to the IA.
In the EU, for example, policymakers and technical experts are currently thrashing out implementation of the European Commission’s sustainable finance action plan. There is also a revised Shareholder Rights Directive that member states must implement this year.
Relevant developments in the UK include a new regulation to strengthen and clarify pension scheme trustees’ duties in relation to ESG considerations.