Due diligence is key when it comes to fund selection in sustainable investing, says Hortense Bioy.
The global director of sustainability research at Morningstar UK says there is a spectrum of environmental, social and governance approaches that meet different investor needs and advisers should ensure they never rely on a fund’s name alone.
She says in many cases there is not a single datapoint that will give advisers the complete picture of an ESG investment, making the process more tricky, however there are things advisers can do.
Above all, they should always check the portfolio is in line with their clients’ expectations.
In a Q&A with FTAdviser In Focus Bioy explains what the Financial Conduct Authority has in store for ESG and what advisers can do to ensure they pick the right ESG strategy for their clients.
FTA: The ESG market has grown fast and with it the issue of greenwashing. What’s your assessment of what this market needs to make it functioning for advisers and investors?
HB: The market needs more transparency and standardised disclosure, which is what regulators across the world and standard-setters are working on, with Europe leading the way with the Sustainable Finance Disclosure Regulation and EU taxonomy.
There is also a need for more education to close the expectation gap that currently exists within the adviser and retail investor community.
FTA: What will the FCA’s new sustainable disclosure rules and labels bring to this market, will it be enough or do we need different regulations altogether?
HB: The product classification and labelling system that has been proposed by the FCA is interesting because, unlike the EU regulator, the FCA has decided to take a labelling approach with its proposed five distinct labels, including three for sustainable investments.
Investors like labels because they’re easy to consume. To make things even easier, the FCA has also shared how products already classified under SFDR can map against the UK framework.
The latest I have heard is that terminology for labels is still being worked through, but the regulator could be looking at sustainability ‘focused’ (what was previously ‘aligned’); 'improvers' (what was previously ‘transitioning); and 'impact'.
There will be no label for products with either no, or only ‘general’ sustainable objectives. Marketing and product naming rules will likely be changed to prevent such products using ESG terms.
As always, the devil is in the detail, so it remains to see how easy or not these new disclosure rules will be implemented.
FTA: It looks likely that advisers will be forced to discuss ESG products with their clients under rules mooted by the FCA, what do you make of the idea of introducing non-financial considerations into the advice process?
