Some will doubtless want to add 'governance' – and possibly 'ethical' issues – which is fine. My reason for skipping governance is simply because retail clients rarely ask about it, so I would embed it elsewhere. Whatever the system, the aim must be to ensure people understand where funds will and will not invest, and how a manager is working to influence companies through voting and engagement.
I also believe sustainability information must be integrated more widely. Issues like climate change, nature loss and equality are no longer optional bolt-on’s for other business – so why would it be for investors?
As such, sustainability should have a higher profile in all standard literature, training, advice processes and compliance reviews. This may take time to settle, but better conversations and actions will flow if everyone understand the area.
Classifications
Figure three on page 15 of DP21/4 sets out a series of classifications or labels that appear likely to be more contentious. They effectively range from ‘nothing’ to ‘impact’. I am well aware that undertaking an exercise like this is incredibly hard, but a bad-to-best scale feels risky. It can underplay the realities of investing in often complex companies, and does nothing to reflect (much needed) fund diversity and specialisms.
The suggested labels are also ‘very institutional’ and ‘very now’. ‘Transitioning’, ‘aligned’ and ‘impact’ – are useful and popular today – but they are very specific and may not all stand the test of time. They are also neither retail friendly nor watertight. Transitioning and alignment are also very similar. both aim to drive progress.
My suggestion is to split this in two. Use simpler labels; something like 'basic', 'hybrid' and 'sustainability themed', which would loosely map to the EU’s Sustainable Finance Disclosure Regulation classifications, which would help many managers.
Additionally, emphasise the different areas funds focus on – specifically environmental, social and sustainable – perhaps with an illustration along the lines of food labelling (red, amber, green). Deeper explanations would be found in the disclosures document.
These are my personal views. They draw on experience and recent conversations. They are intended as encouragement because how we invest over the next few years really matters.
Through our work we have learned that labels need to be flexible and evolve over time. Our SRI Styles are popular and work, in part, because they are designed for retail intermediaries, focus on issues and do not mention metrics.
