The investment industry has long been criticised for its ‘jargon’ – and then along came responsible investment and a whole new array of terms for clients to get their heads around.
‘Sustainable investing’, ‘ESG’, ‘ethical’, ‘green’ and ‘impact’ are all phrases that have been used interchangeably since the uptick in demand from clients wanting to connect their personal values to their portfolios.
The good news is that the understanding of the different terms associated with responsible investing has improved – the bad news is that it is still generally poor.
According to RiF research, negative screening as a term has the highest level of knowledge among intermediaries with 37% of DFMs and 15% of advisers indicating they have good understanding – this is compared to 11% for both peer groups in 2019.
As we know, negative screening is most commonly used in ‘ethical’ funds, where some of the oldest responsible investment vehicles sit, perhaps explaining the increased understanding here.
Additionally, some 26% of fund selectors said they have ‘good understanding’ of sustainable investing as a term, again up from 11% in 2019.
However, only 6% said they understood what impact investing means and some 27% said they did not understand this at all.
“While general understanding and awareness of terms is improving each year among retail intermediaries, there is still much to do with regards to the definitions of several terms,” Jack Dominy, research manager for RiF, commented.
“Impact investing, for example, is still relatively unknown to many professional investors; the majority appreciate the positive sustainable impact element but are unaware that this type of investing aims to achieve a positive financial return.”
At a time where investors need further education and more stringent definitions of fund labelling, regulators also appear to be grappling with the best route.
In the UK, the Financial Conduct Authority (FCA) has called all consultations related to responsible investment ‘ESG’, while the term adopted by European regulators is ‘sustainable investing’ – but they are essentially looking at the same area.
Both are also looking at ways to define the funds that sit under responsible investing. Last year, the EU rolled out the Sustainable Finance Disclosure Regulation (SFDR) requiring asset managers to categorise portfolios based on their level of sustainable investment.
These categories are:
Meanwhile, the FCA is coming up with its own fund labelling – the Sustainability Disclosure Requirements (SDR). The regulator has been consulting the industry on sustainable investment labels and consumer-facing disclosures for investment products, but has since delayed publishing its findings from the second quarter of 2022 to the autumn, in order to “take account of other international policy initiatives”.
While it did not mention which global policy initiative it is referring to, the FCA has already committed to using the International Sustainability Standards Board (ISSB) – another framework that will inform companies on how to disclose on sustainability and climate change credentials – as a baseline. While not product-specific, it will clearly have an impact on the holdings within funds.
Dominy added: “Regulation must find a way of making all responsible investing lexicon tangible and easy to connect to real world examples, or risk the benefits of these different types of investing not being realised to their potential.”
For an industry that is well-known for its ‘alphabet soups’, a more unified approach to definitions, especially across jurisdictions such as the UK and Europe where there is a high overlap in distribution, would be very much welcomed by responsible investment professionals.
While we wait for further clarity, DFMs and advisers can use the following resources to help educate clients on the different terminology in ESG:
*The UK Responsible Investing Study (UKRIS) quantitative research surveyed 215 retail intermediaries, providing a wealth of information in responsible investing. The latest findings are taken from Wave 3 of this annual study conducted by Research in Finance. The study included feedback from a mix of DFMs (110) and IAs (105), and fieldwork was conducted in December 2021 to January 2022.