Responsible investment definitions dependent on investment platforms and IFAs

Asset managers are torn on how the industry is likely to adopt the Investment Association (IA)'s common language framework for responsible investments.  “It is picked and adopted at scale by the intermediaries and by that I mean the investment platforms, the likes of Hargreaves Lansdown… and the independent financial advisors (IFAs) that service that sector …

by | December 3, 2019 | bobsguide

Asset managers are torn on how the industry is likely to adopt the Investment Association (IA)'s common language framework for responsible investments. 

“It is picked and adopted at scale by the intermediaries and by that I mean the investment platforms, the likes of Hargreaves Lansdown… and the independent financial advisors (IFAs) that service that sector of the market where the knowledge of this topic is not high and many of those advisors who have never really had to be. Hopefully this will help that group and those platforms to think a bit more systematically,” says Will Oulton, global head of responsible investment, First State Investments.

“To make sure demand is met, you need to be able to articulate what the actual products are, how they differ and what their characteristics are to meet this interest. You just need to look at some of the investment platforms, which are heavily technology driven in the market. None of them are particularly strong in categorising and describing particular products. You’ll find an ethical investment category on a number of them, but people often aren’t looking for ethical type funds, they are looking for more sustainability versions of those funds. And ethical funds have got a particular characteristic that is well known and understood within the industry but not for people who are outside of the industry looking to invest,” he said.

On November 18, the IA brought out a common language and standardisation for categorising responsible investment products. The guidelines were brought about by a need to bring clarity to the categorisation of responsible investment approaches and standardised definitions “including commonly used terms such as ESG integration, stewardship, impact investing exclusions and sustainability focus,” according to a press release.

The IA said in it will be asking firms to identify which of their funds should be labelled as having responsible investment characteristics in January 2020.

However, there are also ongoing discussions happening between the European Commission and European Parliament around constructing a common set of definitions for environmental, social and corporate governance (ESG) products. This, Ryan Hughes, head of active portfolios, AJ Bell says could make the industry reluctant to adopt the IA framework until those discussions have come to a conclusion.

“What is really important is that all parts are joined up and end up following that same similar framework,” he says.  “The IA is making good strides, but we need to wait for the EU and the government at that level to conclude as well.”

Hughes pointed to recommendations made by the European Commission’s high level expert group on sustainable finance in January 2018 to include ESG disclosures for all indexes excluding interest rate and currency benchmarks which is still being discussed between the political institutions.

While Oulton says the system updates needed to comply with the guidelines will have to be weighed up on a firm by firm basis, Emma Wall, head of investment analysis at Hargreaves Lansdown said in an email that the firm is in the process of implementing the common language across its website and research, and will be using “technology to help identify where the language needs updating”.

For Oulton the IA’s framework is hoped to give asset managers greater insight into movements in the responsible investment sector. 

“The IA will use this now to measure flows in the UK market around these types of products where to date they’ve only had one category that they have been measuring the inflows or outflows of capital to which is ethical investments. Which is a really small part of the market. There is a lot more development and a lot more assets going into other types of sustainable or responsible types of investments.

“So that will be a huge plus, is that we will get a better insight as an industry actually where are flows going to, what types of products as we can see with this framework,” he says. “That will really help asset managers in terms of looking at their own portfolio of products and where the success may or may not lie.

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