IN THE “Wild West” of investments, four new desperadoes have arrived to right some wrongs.
These “four horsemen” are labels introduced by the Financial Conduct Authority (FCA), which could trigger an apocalypse for “greenwashing”: the practice that makes investment funds appear more sustainable than they are.
Consumers will see how FCA-authorised firms who make sustainability-related claims about their products and services are faring — simply by looking at the labels.
The labels cover funds where at least 70 per cent of the assets are invested according to the sustainability objective identified by one of the four labels: “Sustainability Impact”, “Sustainability Focus”, “Sustainability Improvers”, and “Sustainability Mixed Goals”.
Only funds investing in assets directly making a positive impact for the environment and/or society can use the “Sustainability Impact” label. “Sustainability Focus” covers funds investing in assets that meet an evidence-based standard of sustainability.
“Sustainability Improvers” covers funds investing in companies that can demonstrate concrete goals towards meeting an evidence-based standard of sustainability. “Sustainability Mixed Goals” cover funds that invest in a mix of the above styles.
Finance experts see the FCA’s anti-greenwashing measures as a milestone. People concerned about where their money is invested will be able to make more informed choices. But there is still a journey ahead, finance experts say.
Dr James Corah is head of sustainability at Churches, Charities and Local Authorities Investment Management (CCLA). It is the UK’s largest charity fund manager.
“In some ways, that will be helpful for clients trying to navigate the universe; in some ways, it won’t be helpful,” Dr Corah said of the funding labels. “A labelled product doesn’t necessarily mean that it’s avoiding tobacco, for instance.”
Dr Corah offered a brief summary of the new labels. They are based on the idea, he said, of using your money to drive change. The aim is that sustainable investment should lead to positive social or environmental outcomes.
The “Sustainability Impact” label addresses the question: How do you put your money directly into projects that are scaling up? The “Sustainability Focus” label can direct investors to companies already involved in sustainable activities.
The “Sustainability Improver” recognises that some of the world’s biggest businesses may be important, but perhaps not as sustainable as they could be, and need help to improve. The “Sustainability Mixed Goals” label is a blend of the other three.
Do funds have to use the new labels? “There is no requirement, but it does create new rules about what you have to do to call your fund a sustainable fund, which, I think, is quite helpful, cutting through all of the noise,” Dr Corah said.
What further encouragement does he find? “There’s a real renaissance in Christian investors’ wanting to use their mission. We’re seeing some of the denominations that traditionally haven’t been at the forefront of this stepping up and using their global position to try and say that there is a Christian way of doing investment.”
One of the documents that he regards as potentially game-changing is Mensuram Bonam. This is the Vatican’s call to action, to enter the realm of investing with faith-consistent criteria.
In Latin, “investire” means “to dress, to clothe”, and “to endow with authority”. The paper, from the Pontifical Academy of Social Sciences, says the first act of literal investing is in Genesis, when God — having expelled Adam and Eve from Eden for their disobedience — “made garments of skins . . . and clothed them”. By making clothes for them, God eased their fears and restored the capability for relationship.
“That [Mensuram Bonam] has the ability to mobilise the Catholic Church, which is exciting,” Dr Corah said. “I think, at its core, this renaissance, in connecting Christian values with investment markets, is really interesting.”
JAMES ALEXANDER is the chief executive of UKSIF, which describes itself as the UK’s leading membership organisation for sustainable and responsible finance. UKSIF members include banks, asset managers, pension funds, and non-governmental organisations.
The chief executive of UKSI, James Alexander
He sees the arrival of FCA fund labels as the big change. “If you are describing your fund as an impact fund, or a sustainable fund, from the end of this year that actually has to mean something,” he explains.
“There’s a whole framework that’s been developed. We’ve spent a lot of time working with the FCA on it — and we’re really pleased and excited about how this framework will work.”
This includes regulation and “robust criteria” in relation to “anti-greenwashing”. These ensure that any “green” claims or statements made by investment firms, banks, and others have to be backed up with evidence.
“You’re going to be able to go to your financial adviser — or, indeed, to an asset-management firm that’s advertising their range of sustainably labelled funds — and find out exactly what the non-financial goal and objective is of that fund,” he says.
“It’s something in which the UK is really leading the way. And we’re really hopeful that, by the end of the year, there’ll be quite a lot of these sustainably labelled products on the market that people can speak to their financial adviser about.”
A similar revolution happened with food products, he suggests. “The food industry went through its own labelling process, and I think that’s made a really big difference to consumers.”
The fund labels, he explains, have been designed specifically to apply to “retail-facing” funds. These are funds designed for ordinary consumers to invest in, either directly through a fund manager or via a financial adviser.
While it is a voluntary framework, the labels have become “protected terms”, Mr Alexander says. “Retail-facing funds that want to describe themselves as sustainable will need to have the labels in order to do so.
“If you see the words ‘Sustainable Impact’ in the name of a fund, from the end of this year, it does have to mean something. There’ll be a full fact sheet that comes with that, which will give you — as a consumer — a lot of information around what that fund is trying to do.”
CHARLENE CRANNY is a Chartered Sustainable Investing and Finance Professional, and the founder of Economy of Good, a website designed to help people to know how to upgrade their finances more sustainably. She has appeared on Sky News, BBC News Online, and LBC Radio, in The Guardian, and in other media outlets, offering people her financial know-how.
Ms Cranny believes that the new FCA fund labels constitute a significant development: “Ultimately, these labels exist to help people find truly sustainable funds — meaning, we hope, that more money goes into them.”
The founder of Economy of Good, Charlene Cranny
Consumers, she explains, should expect to see the sustainability labels appear on company websites: “Some investment managers are starting to apply those labels, and prove that they are able to align funds with one or more of them.” But, she says, there is still a long way to go to continue to improve the ethics of the UK’s financial markets. “Having those labels will get robust sustainability information to investors. But they are no silver bullet. Investors still need to choose sustainability.”
What other developments does Ms Cranny see happening? “Large UK companies have to report on how they’re transitioning to net zero. The gold standard for transition plans is global, leaving no excuses on quality,” she said. “That’s even more information for investors — and the whole of society.”
Ms Cranny offers further hope for those who seek more wholesome investments: “UK companies are expecting to report on risks and opportunities when it comes to people, climate, and nature, in line with global standards.
“The UK Government plans to decide on whether to endorse IFRS-ISSB standards in early 2025. It’s very unlikely they won’t.”
IFRS (International Financial Reporting Standards) and ISSB (International Sustainability Standards Board) develop sustainability-disclosure standards.
Ms Cranny is optimistic, but simply having access to information is not going to change things. Investors need to start considering their choices now and not wait until these developments mature, she says. But, ultimately, law and regulation will best shape an economy to consider people and planet, she says. “Most companies have proven they won’t without it.”
JAMES PERRY is a co-founder of both the frozen-food company Cook, and Snowball, an investment company. Snowball seeks to challenge the finance system by investing on the basis of positive impact.
The link between the two is that, in seeking to be a company with a positive impact, Cook joined the B Corp movement, which Mr Perry also co-founded, to encourage businesses to have a positive impact. But, as Mr Perry puts it, “Impact businesses need impact investors,” and so Snowball was born.
A founding partner of Snowball, James Perry
Mr Perry welcomes moves such as the sustainability labels. “The regulations are getting much better — particularly driven by the EU, actually — around much more rigorous, essentially labelling and categorisation of investment products.”
The ethical-investment world is changing. “It has historically meant negative screens of sin stocks, basically: ‘I don’t want to be part of providing people with tobacco or arms or porn.’ Whatever your tastes are, you exclude certain things — and then you think it’s ethical.”
“Investment is a positive activity,” Mr Perry says. “Investment is a vote for the world you want to live in. It’s such a false situation where you say, for example, big tobacco is a sin stock, but big pharma isn’t, or big food isn’t. The food industry drives a huge obesity crisis, and a huge planetary crisis, but that’s fine from an ethical point of view — yet tobacco isn’t. It’s an impossible line to draw.”
In Mr Perry’s view, the idea of ethical investment has been intellectually incoherent: “The only way to approach this subject is with a positive approach, to say, your capital deployment is a vote for the world that you want. It shapes that world; it invents the future.”
The social and environmental impact of investment is “materially important”, he said. “It’s no good screening out particularly bad things. You have to think about your social, environmental impact of everything — which takes you into a totally different place.”
What examples can be found? “We’ve got investments in cool stuff, like a business which farms seaweed,” Mr Perry explains. “Seaweed is a huge carbon sink, but then you can harvest the seaweed, and you can actually turn it into fertiliser for our farmers.”
Currently, Snowball is open only to institutional or high-net-worth private investors (with more than £100,000 to invest). The company waits to be publicly listed, and thus permitted by the regulator to sell to the person on the street. Then it hopes to be a one-stop shop of savings provision to help people to make a positive impact with their money.
Will Snowball carry the new fund labels? “These labels are for products sold to the retail investor,” Mr Perry says; “so we haven’t gone through the process. We would expect to get certified as and when we start retailing.”
To begin this journey — whether investment in wind, solar, or seaweed, or somewhere else that offers a positive impact — the place to start is to recognise that the established system is designed to exclude ethics and spirituality, Mr Perry says.
The system is based on the belief that profit is good: it is the driver of prosperity. “Anything goes in making that profit, as long as it’s lawful,” he says.
As with all financial products, consumers still need to do their homework to find out how and where their money is being invested. But, increasingly, there are independent financial advisers and investment managers, along with organisations such as Snowball, who want to offer positive ways of investing. “What your money does in the world is your responsibility: it has your name on it. Therefore, move your money,” Mr Perry says.
Mr Alexander believes that people want to understand where their money is going, and the kind of world that their money is creating. “It’s not just sitting under a mattress. It’s actually doing something in society, and having some sort of impact.”
Clive Price is a freelance contributor to the Church Times. He is communications manager of the Methodist Ministers’ Housing Society, and runs his own consultancy to assist organisations in their PR.
fca.org.uk
ccla.co.uk
uksif.org
economyofgood.co
snowballimpactinvestment.com