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IA Introduces Guidelines for ESG Investing

Investment trade body urges industry to adopt a common language to help people better understand sustainable investing

Annalisa Esposito 18 November, 2019 | 3:04PM

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The Investment Association is urging companies to use a "common language" when it comes to talking about sustainable investment options, to help investors compare funds more easily.

The investment trade body has today published guidelines to add clarity to responsible investing, defining a large variety of terms such as thematic investing, negative screening and shareholder engagement. It is hoped it will make it easier to compare funds with a focus on environmental or social outcomes.

The world of sustainable investing can be tricky to navigate because of its often-confusing terminology, which can mean different things to different people. It is feared that such confusion may prevent savers from picking a fund whose strategy matches their own investment view.

Morningstar's European head of sustainable investing Hortense Bioy, says: "This is a welcome initiate and the framework makes sense; investors need guidance and education."

This issue has also become increasingly relevant as climate change has been in the spotlight in recent months and there is an increased focused on improving diversity on company boards. 

“Today’s savers want to understand the impact of their investments on the world around them,” says Chris Cumming, chief executive of the IA.  “One significant barrier to the growth of responsible investment has been the lack of a common language and framework that describes and categorises these approaches and product.”

A Common Language

The IA's definitions are based on consultation with more than 40 investment management firms, representing a total of £5 trillion of assets. More than eight out of 10 firms that responded to the industry consultation support a fund-level label, with the intent of providing clarity to investors. It is hoped that properly labelling funds will ensure that investors choose one which matches their expectations. 

Annalise Toberman, head of responsible investment research at Research in Finance, believes that the use of labels will also help advisers and wealth managers who are keen to understand more about sustainable investing.

“Many advisers tell us they appreciate the value of ESG integration and the business opportunities provided by growing client demand for more sustainable portfolios, yet until now they have felt overwhelmed by this burgeoning market,” she says.

Research by Research in Finance suggests that more than a third (37%) of advisers think introducing a common language to explain sustainable investing will help propel the rate at which it is adopted by investors. However, Toberman warns that labels shouldn't replace proper due diligence, nor should they prove too restrictive to fund managers.

Toberman adds: "Different individuals and firms interpret ESG, sustainability, and impact differently. But 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,” she says.

Bioy also points out that labelling funds is not a silver bullet for the problem. She says: "The framework focuses on investment processes, not product outcomes. It answers the question: 'How has my asset manager taken account of ESG factors?' but it doesn't answer th question: 'Is my investment sustainable?"

Definitions

According to the new guidelines, Thematic Investment is a form of positive screening in which managers invest in companies that solve specific ESG challenges such as sustainable energy technology or water management.

Meanwhile, Negative Screening means excluding a particular sector from an investment portfolio – examples include thermal coal, tobacco and weapons companies.

Elsewhere, Shareholder Engagement is a way for managers to help businesses transition to more sustainable practices by engaging with companies.

Impact Investing is a way to solve pressing social or environmental challenges as well as generating a financial return.

The definitions also include the explanation of E, S and G – where E means factors relating to the planet, S to people and G to how a company is run and being held accountable.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

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