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New “common language framework” for responsible investing

19/11/2019

Yesterday, the Investment Association unveiled a ‘common language framework’ for responsible investing following an industry-wide consultation, which included input from a UK government taskforce, member firms and external stakeholders.

The consultation sought to address the lack of common language and framework to “define and categorise different responsible investment approaches carried out by investment managers”.

In an industry already filled with heavy jargon and a hell of a lot of acronyms, the many different terms used around responsible investing is adding further to confusion – does everyone agree on their use of sustainable, ethics, green, responsible products, not to mention ESG and SRI (those acronyms again)? Most definitely not.

In Research in Finance’s Responsible Investment Review, published in summer 2019, the lack of consistency in fund managers definitions was cited as the biggest barrier to sustainable investment by discretionary fund managers.

The outcome of the IA consultation is to label firms and funds separately and differently.

Firms may be able to tick the following boxes:

Stewardship
ESG integration
Exclusions

While funds will be able to comply with the following:

Stewardship
ESG integration
Exclusions
Sustainability focus
Impact investing

To view the full definitions click here

The IA said the aim is not to represent a standard or label in and of itself, but to create a set of industry-endorsed definitions to demonstrate the common approaches to responsible investing by asset management firms. The trade body is encouraging members to adopt the framework either at the firm or fund level or both, and communicate it clearly. It is also establishing a working group to consider the use of the framework within fund documentation such as KIDS, and to further explore the use of a UK retail product label.

Here, Annalise Toberman, author of the Responsible Investment Review and head of insight and responsible investment research at Research in Finance, gives her views on the new frameworks:

“The IA’s development of a set of responsible investment definitions should better equip the increasing number of investors who are keen to invest responsibly but who struggle to understand the arcane lingo.

“The new labels around ESG, sustainability and impact investing should also help advisers and wealth managers who understand the need to skill up on responsible investment. Many tell us they appreciate the value of ESG integration and the business opportunities provided by growing client demand for more sustainable portfolios, yet up till now they have felt overwhelmed by this burgeoning market. Our research suggests that more than a third (37%) consider the development of an industry-wide standard or taxonomy a factor that will really propel adoption of responsible investing.

“Of course, labels shouldn’t replace proper due diligence, nor should they prove too restrictive to fund managers.

Different individuals and firms interpret ESG, sustainability, and impact differently. And that’s not necessarily a bad thing – there are no clear-cut solutions to complex environmental or societal issues, or easy ways to measure impact or the magnitude of an ESG risk. Fund managers should still strive for transparency regarding their own labels and frameworks, and investors and intermediaries need to make sure that funds fit specific needs.”

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