Although funds that broadly fit within the environmental, social and governance universe have grown rapidly in recent years – to the point where they now account for around 5 per cent of the total assets of UK retail funds – in a world of exceptional volatility, can an adviser really think long term about sustainable investing?
For Kate Elliot, head of ethical, sustainable and impact research at Rathbone Greenbank Investments, the regulatory outlook for providers is unlikely to look radically different to the sustainable finance disclosure regulation deployed in EU countries.
The UK government is presently consulting on its own proposals, and while Elliot does not expect it to differ much from the EU legislation, she does expect the requirements placed on advisers to change further, with an increased obligation to ask clients about their sustainability preferences, rather than wait for the client to ask.
She says: “Many clients don’t like to bring it up, so a change that further requires the adviser to start the conversation will have an impact on the market. We may also see some clarity around the definitions, around what is a sustainable fund compared to an impact fund etc. But that taxonomy, that should be the floor, the minimum in terms of what sustainable investment products are trying to achieve.”
Regulatory proposals
Clive Emery, multi-asset fund manager at Invesco, sits on a number of industry boards and working groups examining the regulatory outlook.
He says: “I have contributed to work by both the Treasury and the Financial Conduct Authority on this topic. I think what you will see in the years ahead is that the skillset of sustainable investment professionals will broaden as the market grows. The key question being asked right now is whether the new regulatory framework in the UK should be rules based or principles based.
"I favour making it principles based because I think the whole sector is very broad, and there will be different types of funds coming to market. The key is that providers present their offerings honestly, and let the end client decide if they are sustainable. In that way, the properly sustainable ones will ultimately succeed.”
Kate Rogers, head of sustainability at Cazenove Capital, says: “Transparency is key to assessing how sustainable a multi-asset fund really is. Sustainable funds should avoid harm and have a significant allocation in assets that are contributing to building a sustainable future. Just like financial metrics are key to appraising the financial performance of a multi-asset fund, impact metrics are important to assess the sustainable performance.
"A sustainable fund should demonstrate alignment to a net zero transition path and demonstrate how the companies within the portfolio generate positive impact."
Eren Osman, co-chief investment officer at Arbuthnot Latham, says one of the major issues to be dealt with is the levels of reporting carried out by sustainable funds. He says this varies widely and that regulators should look to develop a standard level of reporting.
