Our response to FCA Consultation (CP22/20) Paper

January 31 2023 - Jim Blackstock, Product Manager

About us

Ethical Screening provides qualitative and quantitative research and insights to support the Responsible Investment community. We offer a range of services to asset managers via our company-level research, including ESG analysis, impact alignment (such as to the UN SDGs or Net Zero commitment) and performance against industry standard and bespoke exclusionary criteria. Our adviser services include our online Ethical Funds Portal, a product builder with ethical assessment and fund filtering tools, covering rated UK retail responsible and sustainable funds. Our Ethical Screening Fund database also offers indirect marketing opportunities to fund managers in the space, through engagement with our online users and fund provider profiles.

Given our role and position within the Responsible Investment industry, the FCA's approach to fund labelling will have a number of impacts on our business strategy and engagement approach moving forward. We welcome, for example, the FCA's commitment to "anti-greenwashing" rules and calls for greater transparency around sustainable investment rationale, and hope that our portfolio screening experience can support this endeavour. We also wholeheartedly support the aims of fund labelling, and the prioritisation of investor engagement with the sustainable investment process, as greater trust, clarity and transparency will hopefully remove another barrier to entry for investors.

However, given that the labels in their current form will dictate how terms are applied within investment policies, we will be required to evolve our methodologies accordingly so as to not confuse our user base and ensure our definition of an impact strategy, for example, does not contradict the FCA's definition. In this sense, greater clarity in the longer-term may lead to some ambiguity in the shorter-term, and it remains somewhat unclear as to how rigorously these standards are to be policed, given that funds are currently expected to self-certify and criteria for compliance are not finalised.

For our user base of UK advisers, the labels will go some way to redefine how we approach and discuss ethical investment products, and through our online tools we will aim to continue to provide a space where advisers can access and compare best-in-class products for their clients. Our Ethical Funds Portal is also used as a promotional platform by more than a dozen fund providers, covering more than 100 individual investment products, each with an already integrated "sustainable" investment approach. As such, there will be something of a requirement for each of these products to receive a label in order to not be construed as "unsustainable" and to not be locked out of certain sustainability related marketing terminology.

To assess the current thinking around labelling, we conducted a brief survey and asked our partners to state which labels they would likely be applying using the current criteria. Across more than 100 individual investment products, many were not in a position to comment, but of those that did, 72% would fall into the "Focus" label, with the remaining 28% being likely to fall into the "Improvers" label. No funds were expected to fall into the "Impact" label. Given that the definition and criteria of label alignment is likely to be the area to most affect our organisation and partners, we have responded with some brief feedback on Q6 of the consultation paper below.

Q6: Do you agree with the proposed distinguishing features, and likely product profiles and strategies, for each category? If not, what alternatives do you suggest and why? In particular, we welcome your views on:

a. Sustainable Focus: whether at least 70% of a ‘sustainable focus’ product’s assets must meet a credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme?

In discussion with various partners and stakeholders, this appears to be the clearest and most accessible label. However, there is concern among providers of "ethically" orientated funds that avoidance approaches may not be able to access this label, and funds may need to rebalance in order to transparently obtain the 70% threshold, the knock-on implication being that other ratings, such as those for risk and volatility, will be impacted by re-balancing. We would welcome the FCA revisiting a "Sustainable Ethical" or "Sustainable Responsible" label for example, that would allow funds which operate a list of core exclusionary criteria to access a parallel label with a higher proportion of asset alignment expected (covering 100% more of applicable assets).

b. Sustainable Improvers: the extent to which investor stewardship should be a key feature; and whether you consider the distinction between Sustainable Improvers and Sustainable Impact to be sufficiently clear?

This was the only other label which would appear accessible to our fund provider partners, and by implication to the retail fund market more generally. In terms of sustainability rationale, it is understood that climate adaptation and transition is vital in creating long-term viability of the biosphere, let alone certain investment opportunities. As such, supporting the movement of existing systems to more sustainable models through innovation and circular production and consumption cycles, as well as using active ownership as a vehicle for encouraging transition to green technologies, for example, is an opportunity for investors to benefit from growing returns from the regulatory and real-world pressures of global trends. However, the transition argument has also come under significant criticism for being a primary driver of "greenwashing", and as such this label, although welcome and accessible to our partners, may require greater commitment on the monitoring of the theories of change or similar sustainable investment rationales that funds develop.

c. Sustainable Impact: whether ‘impact’ is the right term for this category or whether should we consider others such as ‘solutions’; and the extent to which financial additionality should be a key feature.

Currently, this label appears to be out of reach for our partners and users. The feedback we have received is fairly consistent - that the threshold for evidencing "impact" is simply too high for fund managers, with the emphasis being on direct ownership and influence. Without a re-working of the criteria associated with the "impact" label, this would suggest that "impact investing" (an increasingly established framework among fund managers) would no longer be accessible to the retail market. A "Solutions" category in this space, with a lower barrier to entry for evidencing change would be welcomed, but marketing restrictions around the word "impact" would likely be problematic given its current wide usage among providers who offer positive-orientated products.


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