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How can intermediaries help investors navigate the rapid evolution of sustainable investing?

By: Adele Gray


The acceleration in the adoption of sustainable funds seen in 2020-2021 may have slowed, but investors remain resolute in reflecting their values in investment portfolios and in playing their part in mitigating climate change.

With that acceleration in popularity came a fast evolution in the range of products, ESG frameworks and investment styles. It quickly became challenging to compare the vast array of funds brought to market as new mandates or repurposed from existing vehicles. In an industry that is well-known for its jargon, a whole host of new terms and acronyms were suddenly and regularly being used interchangeably by fund managers and investment professionals. So, whilst end investors understood the part they were playing in saving the planet and ensuring a fair and just society, it quickly became difficult for them to understand what was going on under the bonnet of many funds.

Even now investors are struggling with these terms. In Research in Finance’s Retail Consumer Interests Study, focused on retail intermediaries’ attitudes towards sustainable investing, we found huge gaps in knowledge.

Whilst most intermediaries said they are ‘clear’ that they understand sustainable investing terms such as negative screening (89%) and positive screening (88%), their knowledge levels decline when asked about further common terms; only 60% said they understood thematic investing and 51% understood impact investing. Under half (47%) said they were ‘clear’ on ESG integration and 44% said they understood engagement/stewardship.

We see the rise of a real knowledge gap around the term ‘transition investing’ – a term used regularly by fund groups, trade media and even the regulators in the current environment. Only 12% of intermediaries said they had a good knowledge in this area.

Intermediaries understanding of investment terms bar chart

We also asked advisers, DFMs and paraplanners about their perceived knowledge of their clients. Again, they understand clients to be more familiar with positive and negative screening but at a lower level than the intermediaries’ own understanding, at 39% and 34%, respectively.

Around a quarter of intermediaries said their clients had also never heard of engagement/stewardship, impact investing and ESG integration, while 61% said their clients had never heard of transition investing before.

Corroborating this lack of understanding, not one DFM said their client knew the term.

Perception of client understanding of investment terms bar chart

Educational development

The industry has been focused on education around sustainable investing for some time, but clearly the complexities and nuances that come with these funds is still proving challenging for intermediaries.

As discussed in our previous article on understanding around the requirements of Consumer Duty, intermediaries are looking for more educational materials to support them in outlining key principles, objectives and concepts.

We delved further into what exactly intermediaries are finding tricky. They mentioned managing clients’ expectations around returns, volatility, risk and long-term goals – net-zero targets set as far into the future as 2050 can feel hard to relate to. They also said explaining how sustainable funds can fit into a wider portfolio was a challenge. One DFM told us:

“A lot of the clients don’t understand the risks, and think, well, this time in 50 years, everything’s going to be electric cars, everything’s going to be green, there might be nuclear fusion… and that’s all well and good, and they might be correct in 50 years, but what they aren’t thinking is its going to be a really bumpy road before we get there. So that’s the main thing, it’s explaining these levels of volatility.”

However, the biggest concern flagged was determining instances of greenwashing, which was cited by 60% of intermediaries.

This has been a huge focus for the Financial Conduct Authority (FCA) and after a long Sustainable Disclosure Requirement (SDR) consultation, the UK’s anti-greenwashing rule comes into effect on 31 May 2024.

This new regulation should help weed out the companies that are exaggerating their green credentials or not exactly doing what they say they are – but there is plenty of need for further educational support.

For example, 47% said they class researching sustainable funds as a current challenge, and 52% said they found distinguishing between different types of sustainable funds trickier than when analysing the wider universe.

‘Cut through the woolliness’

When intermediaries talk to clients about sustainable investing, 34% said they already use client facing materials in conversations around sustainability. However, it was noted that current published guidance can be “confusing” and “too lengthy.”

When asked what support they would like for this area now and in the future, the call for educational material rises to 51%. Intermediaries specifically said this would help them ask the right questions, help dig deeper with follow up questions and “cut through some of the woolliness.” Some 51% showed an interest in client-facing materials, while 38% said they would like to see more online tools such as videos or guides.

Fair and clear

The inbound anti-greenwashing rule will require firms to “ensure their sustainability references are fair, clear and not misleading, and proportionate to the sustainability profile of the product and service”.

While that should go some way towards reducing the amount of greenwashing, the onus of researching funds and educating clients is still very much on the intermediaries.

Fund groups will start adopting SDR fund labels from July. While this is another important milestone for the sustainable investment industry’s development, it clearly presents new challenges for intermediaries getting to grips with the labels and their meanings (see table).

However, it could also be an opportunity for DFMs and advisers to further support clients with the educational materials and guides they are crying out for.

How can we help?

Our Communications Compass is a community testing solution designed to ensure that your marketing communication materials are meeting the regulatory requirements. The FCA has indicated that all client communications will need to be continually monitored post-implementation of the duty. Communications Compass allows for both testing and re-testing of specific materials by our proprietary panel of a cross-section of consumers, including vulnerable clients, resulting in a templated report card that reveals a variety of overall indicators, anonymised competitor positioning, suggested improvements, and more.

For more information on how your firm could benefit from joining Communications Compass, please get in touch with Mick Hrabe or Richard Ley. You can also call us on +44 (20) 7104 2235.