Is a sustainable fund really a sustainable fund? ESG Accord’s Lee Coates OBE reminds us why effective due diligence is so crucial when it comes to analysis of sustainable investments and why it’s not always that simple to achieve in practice.
Is ‘greenwashing’ a genuine fear or something and nothing? I’d like to say that it is all hyped, but the reality is that all too often a sustainable investment acorn is marketed as a majestic oak tree. So, advisers are right to be worried about recommending the oak tree to their clients with sustainable preferences, only for the clients to discover that they are holding an acorn.
In an ideal world, the client would be upset with ‘greenwashing’ from the product provider. We are, however, living in an imperfect world and it is more likely that the client would hold their adviser accountable for recommending the misleading product.
Getting good quality data
Whilst normal financial metrics for funds can be crossed checked using multiple sources, advisers are completely reliant on product providers for the accuracy and fairness of the information provided in relation to the ESG and Sustainability aspects of their funds. This should make advisers nervous – what are the known unknowns, and how can they find the unknown unknowns?
Regulatory pressures building
Existing PROD and COBS rules already require advisers to ask all clients about any ESG or Sustainable preferences. The incoming Consumer Duty rules (April 2023) will tighten this requirement further. Consumer Duty rules will, in effect, add the extra dimension of requiring advisers to ensure clients are educated on the subject before asking them ESG and Sustainable preference questions. Alongside this will be the incoming Sustainability Disclosure Requirements (SDR) and Investment Fund Labels. The regulatory landscape allows no space for ignoring or putting Sustainability to the side – it is now front and centre. How advisers differentiate between greenwashing and a genuine proposition is vital for the quality of advice provided and long-term protection of the firm.
At the end of the day, advice on ESG and Sustainable funds needs a robust due diligence process. This challenges funds, their marketing, their objectives and supports the market with feedback on matching client outcomes to funds. Without this participation there is a market failing. Advisers can’t be expected to become experts on all aspects of ESG, Sustainable, Responsible, SDGs, Impact and Ethical, but a robust and repeatable due diligence process can help them gather the information needed to cut through the hype and get to the facts.
The FCA’s Sustainable Fund Label regime will also go a long way to assist advisers with the problem of greenwashing. A Consultation Paper is expected by the end of July with potential for implementation later in 2023. Instead of the current free-for-all where providers can describe their “fantastic” Sustainable proposition in any way they like, the Label Regime will require providers to apply for a label, from the FCA’s small number of options, which best describes what the fund is doing in the sustainable space. Providers will also be subject to a prescriptive transparency and disclosure regime aimed at ensuring advisers and investors get to see the facts. There is nothing wrong with a fund provider being a sustainable acorn, but it is hoped the Label Regime will make it difficult for the acorn to be described as anything other than an acorn.
A process-driven approach
ESG Accord’s due diligence process links directly to our triage and values questions, ensuring that client preferences can be directly matched to funds. The due diligence process does, of course, go much deeper as it contains a wide range of detailed questions designed to draw out the facts and expose any hyperbole. We have used our knowledge and experience to design a question set that draws out, verifies and cross checks the information needed by advisers.
In March, we published our ESG and Sustainable MPS Report. On behalf of advisers, we used over 70 questions to gather information on how Managers built and operated their MPS and how the full spectrum of sustainable options are covered. We have not provided any rating of the individual MPS offerings, because, in our view, the only person qualified to judge whether MPS A is better than MPS B is the informed client looking to make an investment. All other ratings of the subjective aspects of ESG and Sustainability may not be based on the same value set as the client and are, therefore, potentially misleading when comparing funds. The Report gathers the details and provides the answers in an easily searchable online database. Once the adviser has documented the client’s values, these can be matched to an appropriate MPS.
We are currently working on a similar due diligence report for the Tax Efficient market and later in the year plan to produce our Report on ESG and Sustainable MultiAsset and MultiManager funds.
About ESG Accord:
Lee Coates OBE is Co-founder and Director of ESG Accord and was an ethical investment specialist IFA for 31 years.