The UK’s asset management body has launched a framework to avert confusion about responsible investment stemming from inconsistent use of terms and phrases.
The Investment Association (IA) said the framework categorises the most common approaches to responsible investment at a firm- and fund-level. According to the framework, these are: stewardship, ESG integration, exclusions, sustainability focus, and impact investing. The framework, which follows a consultation earlier this year, is accompanied by standard definitions for these approaches, which the IA noted are not mutually exclusive.
Investment managers are encouraged to adopt the framework and definitions, for example to communicate with clients and/or stakeholders such as policy makers, the IA said.
“The agreement of industry-wide definitions provides consumers with that much-needed clarity and choice,” said Chris Cummings, chief executive officer of the trade body.
“The investment management industry can now give its customers a clear picture of the opportunities available to them and the confidence that their chosen product matches their expectations,” he added.
Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority (FCA), said the regulator welcomed the initiative “to bring consistency and clarity to the responsible investment market”.
The FCA recently said it will be clarifying its expectations around the creation of green financial products for consumers, and challenging firms where it sees potential for consumers to be misled.
The IA is going to continue exploring a UK retail product label to do with responsible investment, with more than 80% of those responding to its consultation supporting such a label. The remainder questioned retail as the target audience mainly because they felt institutional investors would also benefit from a label.
Another project the IA envisages for next year, it said, is to set up a working group to consider reporting on sustainability, including in relation to new EU sustainable finance requirements for certain firms to disclose, through “sustainability indicators”, the main “adverse impacts” stemming from investment decisions and advice.
“Despite these new requirements coming into force over the next three years, the nature of disclosing such impacts in a meaningful way continues to pose significant challenges for industry and policy makers, not least because there is no one single framework to communicate them,” said the IA.
Ebel Kemeling, managing director of MJ Hudson Spring, said coming up with a common language about responsible investment was helpful, but suggested it would not end confusion.
“It’s not bad, but let’s not expect too much from it,” he told IPE. “It’s just 10% of what we need.”
Richard Burrett, chief sustainability officer at Earth Capital, a private equity manager focussed on sustainable development, said: “It is crucial that investors understand the underlying screening process for including or excluding investments as ‘responsible investment’ can be a highly subjective term.
“We welcome the IA’s framework and look forward to seeing this initiative develop, since this is only the first step, albeit an important one.”
The IA’s responsible investment framework report can be found here.