Expert: Jess Foulds, ESG Strategy Director, Aviva Investors Facilitator: Brod Whiting, Director JoyndUp
Headlines:
- In order to better understand and categorise investments the FCA are proposing three new labels: Sustainable Focus, Sustainable Improvers and Sustainable Impact
- The real issue for advisers is to understand clients’ wishes when it comes to ESG investing. How can the clients know what is good and what is bad when it is not even clear within our industry?
Context:
Climate warnings within the presentation:
- Extreme Heat: 75% of the Global population exposed to life threatening climatic conditions by 2100 under business-as-usual scenario
- Melting Ice Sheets: Loss six times faster in 2010s than in 1990s. All IPCC scenarios project at least one practically ice-free summer in the Arctic before 2050
- Extreme Weather: 70% of all extreme weather events studied were made more likely or more severe by human caused climate change
Everybody in agreement that this was a real concern particularly regarding global warming. Nobody felt that this was just a natural cycle and normal service would be resumed without taking any action, as is voiced by some sceptics out there.
Labelling regarding Sustainable Investments has been a major topic of conversation for a while, with providers claiming their wares are green. Then of course there are questions how green they are and “green washing”.
The loose guidance from the EU in Article 8 which talks about “Characteristics” rather than “Objectives” may have helped providers to be able to claim that just about everything had the right strategic objective, and make sustainability claims on a very broad range of products.
The biggest debate in the room centred around the Sustainable Improvers category as it seemed that would be an easy label to apply.
There were questions around whether the FCA would police this and what was actually expected to demonstrate “improvement”. It was suggested by Jess and a member of the audience that there would be KPIs and MI to demonstrate progress. Neither of the investment research companies in the room had the desire to rate ESG but they did say they would be adding questions and publishing the KPIs.
Would clients of an ESG persuasion and a strong preference for green solutions want to invest in Shell and BP? Probably not however they get high ESG ratings.
Where does investing in defence fit in - is it a force for good or bad? It used to be a simple: ‘do you want to invest in armaments?’ but what is happening in defending Ukraine may be seen as investing in armaments can be a good cause.
Would investors consider investing in bonds which invest in governments who inevitably invest in their armed forces?
The EU have come out with guidance for advisers but the FCA are yet to do so. Whether the FCA will approach this a little broader remains to be seen. Regarding the use of multi-asset funds and portfolios this is still being wrestled with by the FCA where there has been more clarity on who have been focussing more on equities to date.
The FCA are looking at imposing marketing restrictions for non-labelled products, but as was highlighted, there clearly needs to be more consideration to this. They have for instance stated a firm must not use sustainable or sustainability when it comes to naming or marketing what they refer to as a “sustainability product” without a sustainable investment label.
Key takeaways:
- The FCA’s output in Q3 will hopefully provide more clarity for what is a difficult matter specifically in relation to how to match different define what is and isn’t ESG approaches to different client needs for providers, advisers and clients
- Everybody seems to be in agreement that investments should move in the right ESG direction for the good of all but there is a long way to go
