They have a point. If I refrain from drink-driving, pick my kids up from school on time and generally keep my nose clean, I might call myself a responsible adult. But I do not expect a medal or a badge. Doing those things is ultimately in my own interest. So it should be clear that a responsible fund does not have any specific ESG objectives.
The transitioning category could be even more problematic, because according to the FCA’s suggestion, transitioning funds would fall inside the ‘sustainable’ investment universe.
You would expect a transitioning fund to be in a state of movement, from unsustainable to sustainable. However, as currently defined, the transitioning category could provide a home for funds that perpetually remained in a transitioning state. This is like me promising daily that I will be on time for the school pick-up tomorrow, but never quite making it. Far from combating greenwashing, the transitioning badge positively encourages it.
This fudging inherent in the proposed product categories links to another issue with the FCA’s whole approach.
Engagement
The “exclusions versus engagement” debate is perhaps the biggest one in ESG. And like most big debates, there is sense on both sides. If someone does not want fossil fuels, weapons or tobacco in their portfolio, there is no arguing with that personal choice. And yet, we have to at least recognise the argument that if all investors concerned about climate change divest polluting companies, then they will be left with shareholders who do not care, which could lead to worse consequences.
Engagement, or stewardship, is vital to ESG. But engaging with companies to set them on a more sustainable path is harder to do and harder to measure than simply including the ‘good’ companies and excluding the ‘bad’ ones.
This is where the FCA’s disclosure approach really falls down. Take two funds: fund A avoids holding polluting companies and instead holds sustainable ones, while fund B holds polluters and uses its influence as a shareholder, together with others, to push them towards reducing their emissions. As the FCA’s proposals currently stand, fund A would be granted the halo of the “aligned” category, while fund B would sit in the purgatory of the transitioning category with the greenwashers.
Yet fund A’s impact on emission reduction has been virtually zero, apart from marginal impacts on companies’ relative cost of capital. In most reasonable people’s eyes, fund B would be the one that had made a difference.
A similar issue occurs when it comes to holdings in unquoted companies or assets. We have investment companies that invest in wind and solar farms, battery storage, social housing and social enterprises. In a system that relies on asset managers using disclosures from listed companies to put together their own disclosures, these assets are shut out.
