Unlocking the power of responsible investment

Written by Lori Campbell on 12th Oct 2023

This article is from the latest Good Investment Review, available here.

Responsible investment can be a powerful force for good.

It could determine whether the world is able to fix the climate crisis, protect nature, and improve inequality – or not.

However, its ability to drive these vital changes is being held back by inconsistent and confusing terminology, and the lack of an agreed definition of what ‘responsible investing’ actually is.

Demand for investments that make a positive difference in the world has risen fast in recent years, driven largely by Covid-19 and the increasingly visible effects of climate change. So fast, in fact, that regulations haven’t been able to keep pace.

This has led to rampant greenwashing and misleading claims from financial providers whose actions don’t match their promises. It has become too hard for ordinary investors to know what to believe and who to trust.

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Rating responsible investments

Up to this point, it has been largely up to financial firms themselves to monitor and measure their commitment to – and achievement of – responsible investments.

The most genuinely impactful investments are acknowledged by independent organisations such as Square Mile Research, which rates the funds listed in the Good Investment Review. It aims to meet the challenge of greenwashing by providing independent evidence that a fund or company lives up to its responsible investment claims.

It stacks them up against its 3D Investing Framework: “Do Good,” “Avoid Doing Harm,” and “Lead Change.”

In launching this new definition of responsible investment, we’re demanding the investment industry balance risk, return and impact to better serve the interests of its ultimate clients.

Good With Money’s Good Egg mark is a stamp of approval for financial companies that can prove they make a positive impact on the planet, society and their customers.

However, it is clear that standards need to be improved – and enforced – across the entire industry. Action is desperately needed to prevent less-than-green companies from making deceptive claims, so people can easily choose genuinely impactful investments.

A new, agreed definition

Campaign group ShareAction recently challenged the investment industry to adopt its new definition of responsible investing. This is: “A transparent approach, embedded throughout the investment process, that takes the negative and positive impacts on people and planet as seriously as financial risk and return.”

Catherine Howarth OBE, ShareAction’s Chief Executive, said: “A step change in responsible investment ambition is needed if we’re to halt climate breakdown, prevent the destruction of nature, and ensure decent health and living standards for people around the world.

Meanwhile – in the biggest move to combat greenwash in investing to date – the FCA is to bring in tough new rules to help investors easily distinguish between financial products that are genuinely “doing good” from those that are not.

The FCA is clamping down on “exaggerated, misleading or unsubstantiated claims” about responsible investment products that have created a lot of confusion for investors.

Stamping out greenwash

Sacha Sadan, the FCA’s Director of Environment Social and Governance, said: “Greenwashing misleads consumers and erodes trust in all ESG [environmental, social and governance] products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.”

At the heart of the new ‘Sustainability Disclosure Requirements’ is a proposal for three clear labels for responsible investment products:

  • Sustainable Focus requires at least 70 per cent of the product to be invested in assets that aim to achieve a high standard of ESG.
  • Sustainable Improvers includes assets that are not sustainable now but are aiming to be in the future.
  • Sustainable impact will be for products with an explicit objective to achieve a positive and measurable contribution to sustainable outcomes.

Importantly, investment products that do not align with any of these standards will not carry a label. There will be no hierarchy between the labels. Instead, each one is designed to describe a different investment profile and risk appetite to suit varying investor needs and wants.

Improving standards

Crucially, the much-anticipated rules should help to stamp out the misuse of responsible investing terms. Only funds that carry a label will be allowed to use words and phrases such as sustainable, ESG, impact, responsible, green, Sustainable Development Goals (SDGs), net zero and Paris-aligned.

Where ordinary investors are marketed to, the rules will require firms to provide a summary of the products’ key sustainability-related features. This will help consumers to better understand what they are investing in, compare similar products, and hold the provider to account for its sustainability claims.

These new rules and labels should help to provide greater transparency and clarity for investors once the final rules come in. The industry is eagerly awaiting the FCA’s Policy Statement, which takes into account feedback to its proposals, when it is published towards the end of this year.

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