IA's Responsible Investment Framework aims for clarity within industry's ESG space
Investment Week - November 2019
2019 has seen the climate crisis top the global agenda, with images of Greta Thunberg at the United Nations, plastic-clogged oceans and extreme weather capturing the public attention. Closer to home, we’ve seen Extinction Rebellion target the City and the issue for the first time being a focus for all political parties in the run up to the general election. Indeed, in 2019, we also saw the UK become the first major economy in the world to legislate for net zero greenhouse gas emissions by 2050.
These concerns and commitment are reflected in the business world, including the investment management industry. Our aim is to provide sustainable returns for our customers, sometimes over horizons of 30 years or more, and this necessarily leads us to play an important part in preserving the planet for today’s savers and creating an economy that is cleaner, more efficient and working for all.
Last week the Investment Association launched our Responsible Investment Framework – an industry-widecommon language for responsible investment with clear definitions and a framework for product categorisation. This is a major collective step forward towards bringing clarity and consistency to the different ways in which we meet our clients’ sustainability goals and indeed move economy and planet to a more sustainable state.
Crucially, the Framework reflects the diverse ways in which we do this.
As long-term investors in the economy, the spotlight is focussed on the role that we can play in promoting sustainability and mitigating the risks of climate change through our investments and engagement with companies. One way investment managers are doing this is engaging with and challenging investee companies on their material environmental and social risks. This includes material climate change-related risks and opportunities that could impact on long-term returns of the company. The UK already has a strong reputation for stewardship and responsible investment and this is a key component of our industry’s success at home and abroad.
At the same time, it is vital that we help savers and investors better navigate the sustainable and responsible investment fund market, so they can invest in ways that align with their particular values and beliefs - for example, by excluding certain sectors from their investments or achieving a particular sustainability outcome, such as investing in sustainable water or renewable energy.
With the industry facing accusations of greenwashing, it isever more important that we are all on the same page when talking about responsible investment. To date, a variety of terms and phrases have been used in different ways, which could leave customers confused or unable to find the investment opportunities to match their diverse responsible investment goals.
We take this seriously. Over 40 investment management firms, representing £5 trillion of assets took part in our consultation on the Framework and we now have a consistent way to navigate products and understand commonly used terms such as ESG integration, stewardship, impact investing, exclusions and sustainability focus. The lack of a common language has been a significant barrier to date to the growth of responsible investment and with our first ever industry-agreed framework, we have come together to address this and make it easier for all savers to understand the opportunities available to them.
But we know there is more work to be done.
Next, we’ll be exploring a new UK fund label to better empower customers to make informed decisions. The proposal for a UK label enjoyed significant support from investment managers with more than 8 out 10 firms (85%) that responded to our consultation supporting the development of a fund-level label. Providing clarity to investors was the single most cited reason for establishing a label, with firms also keen to highlight the UK’s role as a global leader within sustainability and responsible investment.
From the start of next year, we will also be asking our members to identify which funds should be classified as having responsible investment characteristics to help build a clear picture of the size and growth of this market. The IA will publish statistics on funds with responsible investment characteristics later in 2020.
Finally, with 2050 not a million miles away, it’s crucial we recognise that investment managers cannot tackle these issues alone. Industry, government and the regulator must work closely if we are to facilitate the transition to a sustainable economy. We welcome clear direction from policymakers and a coherent regulatory environment that underpins the government’s ambitions for decarbonisation and climate change adaptation. Such an environment is necessary to empower firms to take investment decisions that are geared towards sustainability. It will also be important that any regulatory intervention maintains the flexibility and proportionality that is needed for innovation and growth to continue to flourish in responsible investment and financing the transition to a sustainable economy and planet.