Of the many terms you hear surrounding responsible investing – the vocabulary continues to mushroom – ‘disclosure’ is the one coming into sharper focus.
A big cohort of newer responsible funds and strategies now have enough track record behind them to be able to report on ESG credentials and environmental and social impact. Professional and even private investors are approaching such reporting with an ever-keener eye, searching for validation of the substance behind the promise of the fund name and prospectus.
Findings from Research in Finance’s latest UK Responsible Investing Study demonstrate the influence of ESG and impact-related disclosures. Around three quarters of professional investors – retail intermediaries and institutional investors – believe the quality and depth of ESG reporting is important when choosing responsible investments. And this belief is affecting outcomes: a good proportion of those stating that the quality of ESG reporting matters to them also claim they have prioritised and/or discounted a fund on the strength (or weakness) of such reporting. DFMs and pension investment consultants are especially likely to have done so.
While arguably the market is not advanced enough for some professional investors to have clearly defined preferences when it comes to the types of disclosure they value, our research shows that reporting on engagement efforts, climate risk and carbon reporting are key for pension schemes and consultants. Climate-related reporting is also important to intermediaries, but they are additionally looking for reporting on themes – possibly to understand more about the investment opportunity offered, possibly to show clients what the responsible funds they hold aim to achieve in a relatable way.
ESG-related disclosure increasingly has the weight of regulation and legislation behind it. The Pension Schemes Act 2021, together with enforcement from The Pensions Regulator, compels £1bn+ pension schemes to calculate their carbon footprint, set targets and report in line with the Task Force on Climate-Related Financial Disclosures’ recommendations. And while not all UK asset managers have to comply with the EU’s Sustainable Finance Disclosure Regulation, some are doing so voluntarily. In the investment trust space, the Association of Investment Companies recently invited its members to submit ESG policies, so that the trade body can make ESG disclosures available on its website alongside performance data and portfolio holdings.
We see improved ESG reporting as a step towards genuine action and impact. Ultimately, what gets measured gets managed. Moreover, greater transparency is needed to avoid overreliance on third-party responsible fund labels, accreditations and ratings, which don’t always give the full picture of a fund or asset management company’s actions and commitment regarding ESG issues and impact.
The limitations of labels were made painfully clear in the recently released Netflix documentary Seaspiracy, which made waves with its chilling claims about the unsustainable practices and human rights abuses of the fishing industry. Discarded fishing equipment litters our oceans, fish stocks are massively depleted, dolphins and whales continue to be unfortunate victims of ‘bycatch’, and fishing trawlers can be manned by slave labour – this was seriously uncomfortable viewing. Yet perhaps most shocking of all was the revelation that all this can happen while sustainable fishing standards and labels are in place. Whether Seaspiracy’s version of events is 100% accurate or not, once you start questioning the legitimacy of the ‘dolphin-safe’ label on your tuna tin, what is the value of that label?
Investor expectations of ESG reporting, as well as more clearly defined standards, can keep asset managers honest. Proper reporting can help assuage greenwashing concerns. It can help give investors a clear view and save them from drowning in terminology, labels and good intentions. It can also take them on a journey, offering an honest appraisal of things as they stand, recent progress and what could be achieved over the following year in terms of engagement targets, emissions reductions and engendering better corporate behaviour.
A ‘dolphin-safe’-type assurance is one thing. A window into what truly goes on at sea is another entirely.
If you would like to know more about the UK Responsible Investing Study and how to subscribe, please contact Toby Finden-Crofts, Richard Ley or Annalise Toberman. Options exist to purchase Wave 2 (fieldwork Nov/Dec 2020) or to become a full member with access to the online community for Wave 3 by expressing an interest now.