UK funds industry looks to introduce ESG labels for retail investors

IA has previously criticised similar scheme from Europe

ESG

The Investment Association is looking to introduce an environmental, social and governance label for retail investors following criticism of the European Commission equivalent for being overly focused on the environment.

The UK funds body on Friday launched its consultation into sustainability and responsible investment.

It is seeking feedback from the industry on UK product labels for retail investors and their advisers and whether these should be optional or mandatory.

The European Commission published its draft Sustainable Finance Action Plan proposals in March 2018. However, several submissions on the proposals raised concerns the recommendations by the high-level action group were too focused on environmental sustainability at the expense of social and governance factors.

The IA called for the Commission to spell out its focus on the environment or risk narrowing the definition of ESG, arguing retail investors could get misled into thinking a product took a holistic approach to responsible investing when it actually had a much greener focus.

On another occasion, following the European Commission’s interim report on the subject published in July 2017, the IA questioned the feasibility of adopting a standardised approach to ESG labeling across European Union countries.

Portfolio Adviser understands any labels would aim to be compatible with similar products produced from the EU.

Terminology and disclosure

The product label is one of three key areas the IA consultation is focused on with standardised terminology and a stock take of reporting frameworks also covered.

ESG, impact investing and negative exclusions are among the terminology for which the IA wishes to create standardised definitions, while reporting frameworks focuses on asset manager disclosure of ESG factors. While retail investors are the target for product labels, terminology and disclosure are strategic areas for the industry to consider.

IA chief executive Chris Cummings said the outcomes from the consultation would ultimately bring more clarity to investors. “Social and environmental change is happening faster than ever before. The asset management industry is at a critical juncture in embracing sustainability as a defining feature of the investment landscape.”

The IA looked to focus on sustainability and responsible investment as a dedicated policy area in 2018, including establishing a committee, which is now one of the industry body’s largest with 35 companies represented.

Will Oulton, director of responsible investment at First State and member of the IA’s sustainable and responsible investment committee, told Portfolio Adviser the consultation is very welcome.

“I am looking forward to the outcomes of the survey as it will be an important addition to the long-standing industry debate on what actually constitutes sustainable and responsible investment, and whether there is a market need for a fund labelling system to better inform investors,” he said. “This is particularly relevant to the growing interest in sustainable investment from the retail market.”

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