On Tuesday we showcased our latest research, undertaken in association with the IA, which asked consumers and advisors for their take on sustainability and tested responses to the FCA’s proposed fund labelling. It’s clear that a simple labelling system would be welcomed – similar to those used with food and energy – but can the FCA achieve that?
At the IA’s sustainability and responsible investment conference, trust came out as a prevalent theme. Sacha Sadan, the FCA’s director of ESG relayed to the audience that the main objective with ESG labelling is consumer protection and integrity. With Mark Manning, the FCA’s technical specialist Sustainable Finance and Stewardship, also reiterating that the labelling system needs to be clear, fair, not misleading and useful to end investors.
Making the case for research
In the past two years, investor support for ESG funds has grown significantly, with savers consistently putting around £1bn a month into these types of funds. No more so than in the run up to and during COP26, which saw record inflows into responsible investment.
From an industry point of view, the sector is responding to this demand and other external pressures, and is transitioning to net zero. Chris Cummings, CEO of the IA said:
The investment management industry today manages some £9.4trn on behalf of clients in the UK, Europe and the rest of the world. Those are the savings and pensions of millions of people who trust our industry to help them have a healthy standard of living in retirement - but who would also want us to make sure they have a healthy planet and society to retire into.
So with a clear priority around ESG funds and ensuring trust – how do customers fit into this narrative? It is clear the industry has a way to go when our research showed that the term ESG was virtually unknown to investors – even to those actively choosing responsible funds.
Customer and adviser research
Together with the IA we ran focus groups with 40 consumers and around 20 advisers. It was important that we captured consumers across the full spectrum from sustainable enthusiasts to sceptics – so respondents were recruited using The Wisdom Council’s proprietary responsible investing segmentation, which maps attitudes to ESG. We’ve completed two stages, with a third phase to come later in the year as we digest the contents of the consultation paper that is expected end July.
Investors – no matter their propensity to invest in RI funds – and advisers alike agreed that a clear labelling system, like those used in food or energy, would offer peace of mind. A clear system, we believe, would help consumers feel like they have more agency in their investment decisions. Dawn Hyams, our Head of Investor Insight and Governance, says:
Any labelling system needs to inspire consumer confidence and it can only do that if it provides clarity and reassurance. The words that we choose for the labels and how we define them will need to do a lot of heavy lifting – for both investors and their advisers.
The focus groups preferred a straightforward framework with clear distinctions between labels. Unsurprisingly, there was resounding support for jargon-free and simplified language and definitions – a language toolkit is in scope for the final phase of the research. Consumers were also sceptical that any company could be classed as fully sustainable.
‘In principle, it’s a good idea. But I suppose it comes down to who really audits it and monitors it’, research participant.
Next steps
Critically, investors must understand and have confidence in the options available to them when the labels come into force. We were told throughout our research that measurability and accountability were needed to gain trust, something that came up throughout the conference. It is fair to say that there are challenges in delivering against this expectation given the inherent difficulties of measuring progress against non-financial objectives.
Mark Manning mentioned that the labels will be ‘initial guard rails’ that the industry needs, but that there’s no doubt in the FCA’s mind that the labels will need to evolve as the market does.
In the very complex and ever-changing world of ESG reporting and investing, it’s clear that consumers need something that isn’t overcomplicated. Will we be able to achieve that? We can only strive to do so by listening to the customer along the way, as one thing’s for certain, responsible investment isn’t going anywhere.
