Guest Spot: Encouraging a more principled approach to sustainable investments

  • Author : Julie Dreblow
  • Date : 15 Jun 2021

Julia Dreblow is a Director of SRI Services and founder of the open to all fund database tool Fund EcoMarket. (

In October last year we welcomed Richard Monks, the director of strategy at the FCA, to our annual ‘SRI Services and Partners’ Good Money Week conference, where he gave the keynote speech on ‘Building Trust in Sustainable Investment’.

His message marked something of a shift in the regulatory response to sustainable investment, focusing on building trust, ensuring messaging was ‘clear, fair and not misleading’ to clients, and targeting greenwash.

So why the shift? In brief: the desire to avert catastrophic climate change.

In April the government announced ambitious greenhouse gas emissions reduction targets.  The UK now aims to reduce emissions by 78% of 1990 levels by 2035 – as part of our plan to deliver ‘net zero emissions by 2050’.

In addition, one of the early casualties of failing to address climate risk would be the financial system – which is why climate is seen as a ‘financial stability’ risk.

Addressing these risks requires the investment community to work with, not against government – which is in part why the Chancellor, Rishi Sunak, wrote to the FCA (and other major financial regulators) in March formally requiring them to integrate climate change into their processes.

The gradual ramping up of activity of this kind since the Paris Climate Agreement in 2015 has contributed to a marked increase in investment in ESG and sustainability funds in recent years, which has been further accelerated by Covid.

However with this growth in interest – and therefore ‘opportunity’ for investment houses – has come opacity which is confusing intermediaries and clients, undermining trust and most importantly – slowing efforts to avert a catastrophe. Hence the tone of Richard Monks’ presentation and the new, draft ‘principles’ it included.

Our departure from the EU means that we are no longer part of their ambitious Sustainable Finance programme. However the government has expressed its intention to ‘match the ambition of the EU sustainable finance action plan’ – so, pending further clarification, the FCA’s focus is largely on what they ‘can’ do without primary regulation.


The boxed text below sets out the five principles listed in Richard’s now publicly available speech.

1. Consistency in messaging and approach. A product’s ESG focus should be clearly stated in its name. And then reflected consistently in its objectives, its investment strategy, and its holdings. This is all about ensuring that a product really does do what it says on the tin and matches consumers’ expectations.

Getting this right is crucial. Inconsistent and indeed poor (or missing) communication means some clients are surprised by where some funds invest, which of course undermines trust.

This draft principle therefore indicates that funds with names such as ‘sustainable’, ‘ethical’ or ‘ESG’ that invest in ways which are barely discernible from other funds are likely to prove problematic.

The FCA is not saying that investors cannot hold controversial companies – but they do expect clients’ reasonable expectations to be met – which means that being able to draw a line from a fund’s name through to its stock selection and stewardship activity ought to be straight forward.

If that cannot easily be done, something is wrong.  And where that is the case, funds may well be misaligned with the core regulatory requirement to be ‘clear, fair and not misleading’ – meaning that intermediaries should be cautious about recommending them.


2. A product’s ESG focus should be clearly and fairly reflected in its objectives. Where a product claims to target certain sustainability characteristics, or a real-world sustainability impact, its objectives should set these out in a clear and measurable way.

The subject of ‘objectives and measurement’ is a little more complicated.

Starting with ‘objectives’. Today, many funds with ESG themes, policies and aims, fail to mention this in their fund objectives.  My view is that if an ESG or sustainable investment fund’s objectives do not mention ESG or sustainability, something is wrong. Sustainability and ESG are either central to a fund’s strategy or they are not.

Targeting sustainability ‘characteristics’ is also fairly straight forward. This is essentially about describing where a fund will or will not invest and their relationship (if any) with investee companies – which should not be difficult.

‘Real world impacts’ are more difficult. There are many funds that explicitly set out to invest in companies that provide useful services, treat their staff well and are helping to address environmental or social challenges.  But measuring the real-world impacts – of an equity investment in particular – is an imperfect science and can easily be under or over estimated.

And of course, no company is perfect. Claims about positive attributes can often be countered with criticism of other aspects (which is in part what the EU sustainable finance taxonomy aims to deal with).

Cracking this one sooner rather than later – in my view – comes down to integrity, by which I mean being realistic about companies and explaining that impact measurement is still fairly new and may be imperfect.  What it does not mean is shying away from trying to measure and manage the key, relevant, real-world implications of investment strategies where possible.

But strategies vary.  Impact measurement is not restricted to the handful of funds that are marketed as being ‘impact investments’.  Many, if not most, of the funds described as ‘sustainable, responsible, ethical, environmental or social’ aim to invest in companies delivering real-world benefits.

Our (free to use) Fund EcoMarket database tool lists 205 OEICs in this area. 94 report that they aim to deliver positive impacts and outcomes.  That number drops to 61 when you ask whether or not a fund ‘measures positive impacts’.  It is reduced further to 52 if you ask which specifically aim to deliver ‘positive environmental impacts’ and 46 if you ask which aim to deliver ‘positive social impacts’.  45 aim to deliver both.  As a result looking under the bonnet is crucial if you aim to deliver sound client advice as strategies vary.


3. A product’s documented investment strategy should set out clearly how its sustainability objectives will be met. This should include describing clearly any constraints on the investible universe. This includes any screening criteria and anticipated portfolio holdings. This should also include the fund’s stewardship approach and actions the fund manager will take if investee companies are failing to make the desired progress.

Describing how a fund aims to meet its objectives should not be contentious – however in my view the wording here is too weighted towards negatives and not sufficiently weighted towards (often nuanced) positive stock selection and searching out growing opportunities.

The reference to the often undervalued area of ‘stewardship’ here is however particularly welcome.

The reason for this is that whilst we must swiftly direct trillions into ‘solutions companies,’ they alone cannot avert catastrophe. Those causing harm to our planet (whether that be through carbon emissions, deforestation or manufacturing harmful or unrecyclable products) need to change their ways.

Regulation aside, one of the best ways to do this is through capital markets.  Company co-owners (equity investors) and financiers (e.g. bonds, banks) have a key role to play here.

Both must now focus on requiring companies to set ‘net zero’ targets and start planning their ‘transition’ if we are to cut emissions, protect habitat and sure up the financial system. Recent activity amongst investors in ‘big oil’ has demonstrated how fast changes can happen.  Activists succeeded in having two new ‘uninvited’ directors voted on to the Exxon board at their recent AGM – because the company’s approach to climate was considered threatening to shareholder value.


4. The firm should report on an ongoing basis its performance against its sustainability objectives. This is about giving consumers the information they need to understand whether the stated objectives have been achieved in a quantifiable and measurable way.

Many of the fund managers we work with already write exceptional thought pieces, blogs, stewardship and voting reports – but there are too many managers who do not – and too many intermediaries are unaware that such information exists.

As the urgency around meeting climate objectives intensifies and use of the (now obligatory for many) TCFD framework increases, pressure for additional fund reporting looks set to increase.  This process started in earnest with listed companies – see FCA PS20/17 – and is evolving. International bodies including IOSCO, IFRS and BSI are all involved in this area.

Proposed ‘Forward Looking Climate Metrics’ – where fund managers are asked to project forward the ‘Implied Temperature Rises’ their investments are contributing towards – are also a useful way of getting people to look forward rather than backward, and may become higher profile at COP26 this autumn.

In brief, watch this space.


5. The firm should assure ESG data quality, understand their source and derivation, and articulate clearly and accessibly how it is used. This includes the use of ESG ratings in the investment process.

This makes sense of course but could prove challenging. Many investment professionals have economics degrees (or similar) and were taught that environmental and social issues were ‘externalities’ (hence the term ‘non financial’ which continues to appear in regulation) – so may not be well placed to interrogate data providers or ratings.

I am not sure ‘caveat emptor’ is quite the right term, but those using data should nonetheless understand the tools they employ.

An excellent way to start to address this is to focus on the science and read ‘Doughnut Economics’ by Kate Raworth.

So to summarise, we now know that ‘business as usual’ will deliver global temperature increases of +3 to +4 degrees centigrade this century, which puts financial stability – as well as our own futures and that of many other species at risk.

The growing interest in climate change amongst UK, European – and notably of course US – policy makers are helping us to collectively turn a corner, but governments cannot deliver the necessary changes on their own.

Getting the financial community to support, encourage and finance the changes that need to take place is crucial.

Funds that are (or claim to be) leading the charge in this respect should not be tied up in regulatory knots – but they must be able to be understood by intermediaries and their clients.

A set of unambiguous principles for fund managers (new and experienced) to adhere to would, in my view, be a most welcome development.


The statements and opinions expressed in the Guest Spot are those of the author and do not necessarily reflect those of Novia Financial plc or any of its employees. The company does not take any responsibility for the views of the author. Any links, web pages and documentation within the Guest Spot are provided by pages maintained by independent third parties and Novia accepts no responsibility for the availability, content or use of the information contained within them.

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