Communicating ESG integration is a challenge that must be met to support market demand.
With more investors looking to influence business for the better and ESG funds outperforming throughout 2020, sustainable investing is a rapidly growing area in fund management. But many advisers struggle to find their way through the maze of ESG regulation, terminology and industry frameworks when talking to clients. A survey by Schroders found that just two in 10 advisers were ‘highly confident’ on ESG, despite the majority considering it part of their fund selection process. This complex area presents a communication challenge for asset managers in providing clarity and useful resources to advisers to help them meet market demand. We’ve taken a look at the online materials of the asset managers that are making strides in the sustainable investing and considered some of the key issues they face.
From negative to positive
Communications around sustainable investments have shifted in recent years towards more positive messaging. ‘Ethical’ investments were not historically associated with high performance and the focus was on screening out ‘sin stocks’ such as pornography and tobacco. But messaging has shifted to frame the choice to invest sustainably as an empowering win-win for investors, society and the environment. Lionstrust, Sustainable Investment tagline is ‘What Are Your Funds Doing for the World?’ while Aberdeen Standard goes with ‘Invest Today, Change Tomorrow.’ However, at the fund level, conversations between intermediaries and clients often start with considerations of negative screening, and require materials to support them. BlackRock plots client motivation from ‘avoid to advance’ to help provide a framework.
Demonstrating ESG integration
It’s no longer enough for asset managers to declare having a policy on ESG integration. The onus is now on them to show how comprehensively they are integrating ESG into their products. Complex structures and processes need to be explained in an easy to interpret format that intermediaries can discuss with their clients. Many asset management firms are making concerted efforts to show how deep and far they are going in this area. Outlining their philosophy, signalling a long-term commitment to responsible investing, showing the size and experience of the ESG team and sharing insights and education supports responsible investing claims. But content describing the integration process can easily become dense and impenetrable. Schroders illustrates its six steps of ESG integration with an accessible infographic alongside more comprehensive information.
The proliferation of sustainable and ESG financial products entering the market has caused confusion across the industry. Firms use fund names both to market themselves and to inform investors. But without a universally agreed definition of sustainable or ESG investing, people project their own expectations of what that fund offers. A Square Mile survey showed that the IFA community is still struggling to get its head around responsible investing, with commercial director Steve Kenny noting “We have investment commentators using the words ‘ESG’, ‘responsible’, sustainable’, and ‘impact’ interchangeably when they are not the same. There is a lot of misinformation in the marketplace and groups are using all sorts of different terms.”
CFA Institute is planning to issue an industry standard for the classification and disclosure of ESG investment products in May 2021. It will require funds to explain to investors how the terms ESG and sustainability relate to the fund’s objectives, constraints, strategies, and characteristics of investments in a way that is both transparent and comparable.
Labels and accreditation
While the regulators try to thrash out agreement on terms, asset owners and managers demonstrate their ESG credentials via labels and accreditations. But with such as proliferation of schemes and awards, there’s the system is always at risk of being ‘gamed’ by unscrupulous players. Consistent efforts are required by accreditation bodies and the firms that gain their approval. The UN-backed Principles for Responsible Investment (PRI) requires signatories to commit to six principles designed to embed environmental, social and governance considerations into mainstream investing and hold companies they invest in to account on ESG failures. They must file an annual report to the organisation detailing their progress and face being delisted if they don’t continue to prove their commitments. Other respected accreditations include the Belgian Febelfin, the French Investissement Socialement Responsible and the UK-based ShareAction.
While investment in general has become more passive in the last decade, sustainable investment has gone in the opposite direction with more emphasis on shareholder activism to deliver change. In its report on ESG marketing for the asset management industry, Peregrine Communications found there was a high demand for content on active ownership, proxy voting and shareholder activism. This presents an opportunity for asset managers whose own actions allow them to contribute authentically on this theme. Blackrock proves its ‘sustainability through stewardship’ with quarterly vote disclosures, vote bulletins and a global engagement summary. And a recent campaign by Aviva, ‘Turning Talk Into Action’, shows how the company uses its voice to help power meaningful change, with a series of clear examples. These included meeting with the Unilever CEO to share their view that the company’s plastic targets should be more ambitious, as part of As You Sow’s Plastic Solutions Investor Alliance.
Education supports supply chain transparency
The confusion over ESG signalled by advisers means the challenge for asset managers is to provide them with clear and usable information to support their interactions with clients. The wealth of information provided needs to be signposted for clarity and an understanding of adviser needs taken into account. M&G provides a clear product framework with top-line information on the approach of its ESG funds. Fidelity and BMO are among firms whose websites provide suggested questions for the adviser-client fact-find process.
Clarity in adviser communications is a crucial part of supporting effective sustainability initiatives. Investors are indicating an increasing desire to match money with morals and asset managers that claim to support sustainable investing have a responsibility to help make this happen.