As 2023 draws to a close, now is a good time to reflect on some of the key learnings from Research in Finance’s most recent annual UK Responsible Investing Study (UKRIS) before the next wave of research launches in early 2024.
Climate change is consistently ranked as the most critical ESG issue for retail intermediaries, and with NASA recently announcing that the Summer of 2023 was Earth’s hottest ever since global records began in 1880, it is no surprise.
Two fifths of intermediaries reported an increase in demand for responsible investment from their client base, from our latest research, driven by greater awareness of climate issues and high levels of media coverage. This is on top of even stronger demand seen over the previous two years. Whilst this demand reflects a positive sentiment overall towards responsible investing, obstacles still exist. The road ahead for responsible investing is not an easy one.
So, what are the barriers to responsible investing?
Concerns around performance when it comes to responsible investments are important, and according to UKRIS, are the key barrier to responsible investing among retail intermediaries. But other, non-performance related barriers are crucial to understanding sentiment too.
Results from the latest wave of UKRIS, which highlights the opinions of over 200 Discretionary Fund Managers (DFMs) and Investment Advisers (IAs), shows that inconsistency between fund managers definitions have led to a lack of comparability and clarity. Both DFMs and IAs are posing the question: What constitutes sustainable/ethical investing?
Q. Which of the following do you see as the biggest barriers to responsible investing? (227) *non-performance related barriers.
Over a third of DFMs and IAs agree that there is a lack of responsible investing research tools and data sources , acting as a further deterrent for engagement.
With the above in mind and returning to an environmental focus, the research shows that greenwashing has also been a growing concern in the asset management industry.
Q. On a scale of 1-5, how concerned are you about “greenwashing” in the asset management industry? (227)
For two consecutive years nearly three quarters of intermediaries’ have expressed concerns of greenwashing, only adding to the cloud of confusion that currently hangs over responsible investing.
What is next for Responsible Investment?
With a strong increase in demand for responsible investment over the past few years, and 95% of intermediaries stating their clients hold some form of responsible fund, it is clear responsible investing is here to stay.
The task that lies ahead is for industry provisions to catch-up with demand and provide clarity to all those involved. Transparency and simplification of sustainable investment strategies, highlighting tangible impact where possible, alongside more robust data sources, must be the next steps towards achieving some level of clarity in what has become a complex and opaque arena.
Medium term the future looks bright, as the Financial Conduct Authority (FCA) aims to launch the UK Sustainability Disclosure Requirements (SDR) in Autumn 2024. The SDR aims to address concern that firms are making exaggerated or misleading sustainability-lead claims about their investment products and will help define the market more concisely. This poses the questions; what are the industry’s opinions to the imminent SDR and how will the industry react next year?
UKRIS Wave 5, launching in Q1 2024, looks to not only provide an update on the state of responsible investing, but to also help answer what the future of responsible investing looks like. Research findings from this study will help investment managers to navigate the topic of responsible investing, by illuminating what intermediaries are looking for and how investment managers can best serve those needs.
