Investment Association joins push for sustainability
The Investment Association, the trade body for 250 UK asset managers, is making a concerted effort to become more involved in responsible investment, seeking to influence government policy and help its members navigate this complex area.
The IA’s Investment Committee, its top committee, formed of chief investment officers, decided late last year to form a Sustainability and Responsible Investment Committee.
Chaired by Mark Versey, CIO of real assets at Aviva Investors, and including front line portfolio managers, the group has been one of the IA’s initiatives best supported by members. Thirty-five asset managers have joined the committee.
The IA is not trying to be super-ambitious to begin with but to create a hub that could begin to support the industry. It has quickly found itself with a hefty agenda.
One of the group’s main objectives is to shape policy. This has soared in importance in the past year, because the European Union, which had previously had little involvement in sustainable finance or responsible investing, has launched an ambitious Action Plan of legislation on the subject, which will introduce many new duties for asset managers.
It is not clear how these will apply in the UK after Brexit but the UK’s Green Finance Taskforce has also set out a bold array of initiatives, though these are not yet government policy.
“A lot of governments are creating initiatives,” said Versey. “Each asset manager has been lobbying on its own, but as a whole industry, asset managers should be coming together on these issues more often and more effectively.”
The IA, which was formed in 2014 when the Investment Management Association merged with the investment affairs division of the Association of British Insurers, has a strong track record of influencing market practice and policy in the area of corporate governance and stewardship. Its Stewardship Code has been copied in a dozen countries.
The association has decided to leave its Stewardship and Engagement Committee alone and make the new group concentrate on the broader sustainability agenda.
This month, the IA published responses to EU consultations on the proposed Taxonomy of environmentally sustainable activities, and on its plans for disclosure on sustainable investments. It warned the European Commission against an “undue focus” on the environment and green projects.
Push from clients
Besides regulation, another push for asset managers is from clients. “Asset owners will start to demand ESG and RI disclosure by their fund managers,” said Versey. “We haven’t really had client demand saying ‘do this, do that’ yet. That’s what we need to get ahead of, so we can provide that disclosure. Some trustees are saying they have a duty of care, not just with regard to the assets they invest in, but to the world people are going to retire into.”
The IA has identified four barriers to growth in responsible investing: a lack of consistent definitions and common language; obtaining consistent, high quality data on the environmental, social and governance (ESG) performance of companies; integrating ESG issues into the mainstream investment process; and a possible lack of visibility of RI products to end investors.
There are three overarching trends in the group’s thinking about the issue. Rather than trying to define RI precisely, it might be better to define a scope or range of different practices. Secondly, is it better to think about the RI process or the outcome? And thirdly, what are clients’ intentions when using different sustainability products?
The SRI Committee has already set up working groups on some specific issues. One is on Standard Definitions and Standards, which is being led by Will Oulton, global head of responsible investment at First State Investments.
Up to now, the IA has had one fairly simple definition of ethical investing. This is no longer fit for purpose today.
Oulton said that even the more complex set of seven RI approaches used by the Global Sustainable Investment Alliance and the European Sustainable Investment Forum, such as Negative Screening, Best in Class and Thematic, needed a review.
The working group is also investigating whether work needs to be done to improve the labelling of UK funds according to their responsible investment characteristics.
“As the European Commission is currently developing its thinking on an Ecolabel and sustainable business Taxonomy, we’ve taken a look at the fund labelling systems that have emerged across Europe,” said Oulton. “The working group have noted that there is little commonality across the current systems. This includes issues such as their sponsors (ranging from trade groups and commercial entities to governments), their criteria, their target markets and their stated benefits.”
The Principles for Responsible Investment is the central organisation for responsible investing. It has an annual compliance process, in which signatories (asset owners and asset managers) complete a detailed questionnaire on how they are implementing the Principles. The PRI then scores them.
But this process is focused at the company level, not specific funds. Labelling schemes for funds include government-backed ones in France and Austria.
Morningstar, the investment data group, launched a Sustainability Rating in 2016. Without charging funds or asking their permission, it rates all funds that have at least 50% of their assets in companies that have an ESG rating from Sustainalytics. The fund rating is based on the average ESG rating of the portfolio assets, compared with other funds of the same type.
But this rating says nothing about how the fund manager practises responsible investment. A fund that held a wide range of companies, including for example fossil fuel producers, but was active in engaging with them to demand better performance might have a low rating.
“Passive funds can’t divest but they can engage,” observed Versey.
One reason why labelling had not been widely adopted in the UK, Oulton said, was that UK asset managers had focused more on integrating ESG across the investment process, rather than creating specific funds. Only a dozen UK funds have joined the Eurosif transparency regime.
“There is a perception that there is a lack of information on the level and quality of integration of ESG into a fund’s processes,” said Oulton.
The IA committee is looking at whether labels would be useful to large or small institutions and to retail investors. It has an open mind at this stage on what the solutions might be, and intends to produce a report by the end of the year.
One motivation is that better labelling might make it easier to show that responsibly invested funds’ performance was as good as or better than that of conventional funds.
Another working group of the SRI Committee is on corporate disclosure on ESG issues, including with respect to the Sustainable Development Goals. The IA wants to promote consistent, comparable and timely disclosure in the way investors would find most useful.
The IA’s fourth workstream is promoting social impact investing.