On 18 November 2019, the UK Investment Association (the “IA”), a trade body representing investment and asset management firms in the UK, launched a final report (the “Report”) on the first industry-agreed responsible investment framework with the goal of bringing clarity and consistency to investors regarding the products and opportunities available to them. The IA looks to continue its collaboration with the investment management industry this year to further develop and clarify approaches to responsible investment.
In 2018, the IA consulted with over 40 investment firms, representing £5 trillion in assets, with the purposes of developing the Report (the “IA Consultation”).
In this sense, the Report presents the first framework agreed by the UK investment industry for common approaches to responsible investment (the “Framework”). The purpose of the Framework is to explain to investors the different components of responsible investment that comprise the currently available approaches to this type of investment.
The Report also contains a proposal for a UK retail product label and clarifications on investment managers’ use of disclosure frameworks for environmental, social and governance (“ESG”) considerations.
THE FRAMEWORK: KEY TERMS AND APPROACHES
The IA defines responsible investment as an investment strategy that encompasses maximisation of long term returns by managing ESG risks and opportunities and identifying how they impact the long-term future of responsible investments. This type of investment recognises the importance of long-term health and stability of the market as a whole.
The IA Consultation revealed that a lack of a common language and framework that describes different approaches to responsible investment, was one of the main challenges to the advancement of this type of investment in the UK. It became apparent from the IA Consultation, that language and presentation largely impact how well the concept of responsible investment is understood by the general public.
With that in mind, the Report sets out the following approaches, components and term definitions for responsible investment:
Components on a Firm Level:
- Stewardship means “’the responsible allocation, management and oversight of capital to create long term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.’” (The Financial Reporting Council’s definition). Examples include setting expectations, oversight of assets and service providers, engaging with issuers and holding them to account; exercising rights and responsibilities (e.g. voting) and escalating concerns.
- ESG Integration means “’the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions.” (The United Nations Principles for Responsible Investment’s definition). Examples include PRI Signatory, Statement of Commitment and firm-wide policies.
- Exclusions mean “the prohibition of certain investments from a firm, fund or portfolio that may be applied at the level of sector, business activity, products or revenue stream, a company, or jurisdictions/countries.” Examples include ethical/values-based/religious; norms and sustainability.
Components on a Fund-Level (a shorthand which can also refer to segregated mandates and individual investment strategies):
- Exclusions as defined above. Examples include ethical/values-based/religious; norms; poor sustainability and ESG assessment.
- Sustainability Focus means “investment approaches that select and include investment on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcome(s). Investments are chosen on the basis of their economic activities and on their business conduct”. Examples include sustainability-themed, positive tilt and best in class.
- Impact Investing means “’investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.’” (The Global Impact Investing Network’s definition). Examples Include social bond funds; private impact investing and Sustainable Development Goals (“SDG”) funds.
- Stewardship: as defined above. Fund level approach and activities are specific to investment strategy.
- ESG Integration: as defined above. Fund level approach and activities are specific to investment strategy.
The Report encouraged investment managers to employ the Framework and standardised definitions in their approaches to responsible investments, including when communicating with clients, policymakers, and stakeholders, mapping their current investment products and services, and creating new products. The idea is to maintain clarity, consistency and promote a more transparent and sustainable economy.
PROPOSAL FOR UK RETAIL PRODUCT LABEL
The Report included a proposal for a UK retail product label, as a method to understand if a fund is adopting a responsible investment approach and to draw global attention to the UK’s responsible investment expertise. While 80% of investment firms supported the need for a UK retail product label, details of such an endeavour have yet to be divulged.
INVESTMENT MANAGER’S USE OF CURRENT FRAMEWORK FOR DISCLOSURE
The IA sought to understand how investment managers were using existing frameworks to disclose:
- how firms employ ESG consideration in their investment processes; and
- how firms disclose against indicators of social or environmental frameworks, such as the United Nations Sustainable Development Goals.
As there is no single industry-wide framework used to measure the adverse impact of investments, the IA found it challenging to accurately measure this area. The IA hopes that the European Securities and Markets Authority’s publication on “sustainability indicators” for the disclosure of “adverse impacts,’” due to be published in Q1 2020, will help shed some light and provide more industry insight.
The IA looks to continue its collaboration with the investment management industry this year (2020) to further develop and clarify approaches to responsible investment. This includes:
- wider socialisation of the framework;
- publication of statistics related to the framework; and
- further consideration into:
- the use of language related to responsible investment in fund documentation;
- sustainability and adverse impact in relation to incoming EU Disclosure Regulations; and
- exploration of a UK product label.
To view the Report please click here.
For more information, and any guidance or advice on the Report, the Framework and responsible investment, Cleveland & Co, your External in-house counselTM, are here to help