Sustainable Investment- either your investment is sustainable, or it is unsustainable.  

June 2023

Having been to the UKSIF Alternative Investment event including drinks, Sustainable Investment is back on my agenda with a vengeance.

Not that it was ever far away from my thoughts. But seeing all the wonderful work that is being done we are left to be disappointed by the short-sighted views of our politicians. I guess that if you work in 5-year cycles, you are unlikely to have any appetite for long-term planning.

The Consumer Duty is mandating the discussion of sustainable investments as part of an adviser’s advice and review process. The FCA is looking to enforce on this issue and has been in touch with the Association of Professional Compliance Consultants to discuss how advisers are embracing this issue. We were to provide incite from our combined experiences and the conclusion was that the advisers needed more education to become comfortable with discussing Sustainable Investments with clients. 

A decent first step on this education journey may be the ESG Sustainable Investment Report that I prepared in time for the COP26 summit in Glasgow in October 2021.  This can be found at  https://www.thecattseyeview.co.uk/esg-sustainable-investment-report-2021/

Weirdly, all the bad news in the press should be good news for advisers as it gives them an easy topical intro to discuss global warming with clients, which leads straight into sustainable investment.

Did you see the forest fires in Canada caused terrible pollution in New York?

Or the flooding in Pakistan?

On 22nd June, The Church Commissioners for England, which manages the Church of England’s £10.3bn endowment fund, has decided to exclude all remaining oil and gas majors from its portfolio, and will exclude all other companies primarily engaged in the exploration, production and refining of oil or gas, unless they are in genuine alignment with a 1.5°C pathway, by the end of 2023.

In 2021, the Church Commissioners excluded 20 oil and gas majors from its investment portfolio. It is now also excluding BP, Ecopetrol, Eni, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Repsol, Sasol, Shell, and Total, after concluding that none are aligned with the goals of the Paris Climate Agreement, as assessed by the Transition Pathway Initiative (TPI).

“The climate crisis threatens the planet we live on, and people around the world who Jesus Christ calls us to love as our neighbours. It is our duty to protect God’s creation, and energy companies have a special responsibility to help us achieve the just transition to the low carbon economy we need,” said the Most Revd Justin Welby, Archbishop of Canterbury, and Chair of the Church Commissioners for England.

This raises interesting issues about whether it is better to try to exercise stewardship on the companies in which the fund holds shares or whether to disinvest.  Once disinvested, the fund no longer has the right to attend shareholder meetings to influence companies into better practices. Also, if fund managers come out of a company, it may affect the business as stakeholders and funding agencies may lose faith in the company. We could have a whole class of worthless abandoned assets of out of favour companies.  Possibly becoming the dinosaurs of our age.

We also have the ongoing consultation about the labelling of funds in future. It will not be compulsory to run sustainable funds. There will be basic qualifications in place to enable managers to describe their funds as sustainable.

Proposed sustainable investment label descriptions and objectives

Category Name

No sustainable label

Sustainable Focus

Sustainable Improvers

Sustainable Impact

Description

Products that do not meet the criteria for a sustainable label

Products with an objective to maintain a high standard of sustainability in the profile of assets by investing to (i) meet a credible standard of environmental and/or social sustainability; or (ii) align with a specified environmental and/ or social sustainability theme

Products with an objective to deliver measurable improvements in the sustainability profile of assets over time. These products are invested in assets that, while not currently environmentally or socially sustainable, are selected for their potential to become more environmentally and/or socially sustainable over time, including in response to the stewardship influence of the firm

Products with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes. These are invested in assets that provide solutions to environmental or social problems, often in underserved markets or to address observed market failures

Consumer-facing description

 

Invests mainly in assets that are sustainable for people and/or planet

Invests in assets that may not be sustainable now, with an aim to improve their sustainability for people and/or planet over time

Invests in solutions to problems affecting people or the planet to achieve real-world impact

 The FCA is keen to have a labelling system that makes it clear for clients about the nature of the underlying in investment strategies within any funds that the cosumer is considering.  Personally, I would not have chosen those titles in that order, but nobody asked me. 

So advisers will need to incorproate sustainable investments into their advice processes and then onto their ongoing recommendations for consumers. But they are still going to be reliant on fund managers to produce nice, clear infromation and also to stick to the ethical criteria of their investment mandates.  These are major causes for concern for advisers as these represent reputational risk and possibly awkward conversations with their  clients at review times.

Interesting times. It could be worse. We could be in politics.