A new beginning for sustainable investment?
Written by George Gers, Research Executive
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Three weeks ago, the Treasury Sub-Committee on Financial Service Regulations held a short inquiry into greenwashing across British financial services. The discussion was centered around new proposals put forward by the Financial Conduct Authority (FCA), which strives to create a much clearer definition of what counts as a “sustainable investment.”
The move comes at a time when the drastic consequences of climate change are evident for all to see. Yet despite these continued warnings, the latest scientific reporting , as carried out by the United Nations Intergovernmental Panel on Climate Change, has found that globally we are still not on track to reach the Paris Agreement goal of limiting global warming to 1.5C. Individual and corporate action now, alongside the choices we make throughout the next decade, will almost certainly impact the lives of future generations on an unimaginable scale. It is time to place corporate interest and profit aside in pursuit of a healthier world, and sustainable investment is just the place to start. Indeed, the recent growth of a collective environmental consciousness has been reflected by the fact that by 2025 ESG-aligned investments are projected to account for a third of all global assets under management. This changing mood has been more recently articulated by Prime Minister Rishi Sunak and Labour Party Leader Sir Keir Starmer, both of whom have recognised the urgent need to green the economy in order to stay competitive.
Defining sustainable investment
Owing to the elevation of environmental discourse, financial leaders across the globe have sometimes been overly keen to demonstrate their green credentials through long-term commitments and pledges, however the phased implementation of these urgent reforms is leading to a growth in “greenwashing” across financial services. Following a lengthy consultation process, the FCA have recently proposed the introduction of sustainable investment product labels. At a simple level these are:
These labels seek to categorise supposedly sustainable investments based on the extent of their sustainability. However, the reforms in their current state would result in the overwhelming majority of investment funds being placed in the “Sustainable focus” category, which is the weakest of the three, owing to the lack of an explicit focus on achieving sustainable outcomes. The FCA believes that these measures will protect consumers from false marketing whilst strengthening trust in sustainable investment products. Conversely, critics have suggested that illuminating the shortcomings of the sustainable investment sector in this manner could undermine investor confidence, leading to widespread divestment and a weakened ESG market.
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Towards a green economy
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In its inquiry, Treasury sub-committee members and witnesses alike appeared to be in broad agreement, echoing one another’s conclusions that the FCAs proposed changes represent a welcome step towards a green economy. Indeed, Mark Manning, Technical Specialist for Sustainable Finance and Stewardship at the FCA, and Sacha Sadan, Director of ESG at the FCA, took turns in claiming that these proposals signal Britain’s renewed commitment to its position as a global leader in sustainable finance. However, Mr Manning and Mr Sadan may have somewhat overstated the extent of the impact of the proposed reforms, especially given the fact that they are yet to work through the 239 consultation responses, which may lead to a watered-down final policy. Although, it is fair to say that in their current state, the changes would certainly begin to combat against greenwashing in financial services.
However, there was a notable sense of trepidation from the Chief Executive of The Investment Association, Chris Cummings, who argued that whilst clear financial incentives do exist to green the economy, this process must be carried out with great consideration. Mr Cummings subsequently highlighted that the strength of the financial sector is founded upon stability, adding that whilst the FCA has the right to implement firm standards, maintaining the trust of investors should be the priority. He warned that the proposed changes risk disenfranchising consumers who desire a more balanced return on their investments.
These comments should not be misconstrued as a call for inaction by the investment community. Mr Cummings praised the overall strength of the ESG market – also recognising the significant potential of the sector and adding that ESG funds often represent safer long-term investments. The opportunity – and the clear direction of travel – is towards greater embedding of truly sustainable investment. The challenge in the immediate term is bringing the sector on this journey at pace without compromising on the scope of reform. The FCAs proposals, due to be finalised by the end of Q2, undoubtedly represent a positive step and with any luck, will pave the way for further, well-considered regulatory reform and ultimately, a greener economy.?
But why not go further?
As it stands, the FCA has ruled out imposing financial penalties on those investment firms who previously mislead consumers. If the goal truly is to create a green economy, why tolerate and subsequently overlook the behaviour patterns of firms who have consistently sought to place a pursuit of traditional models of profit ahead of the environment. Political concerns around the scope and enforcement of the proposals are already growing, with the Treasury Sub-Committee having now issued several follow up demands to the FCA on the back of its evidence session. Additionally, the current set of proposals only includes investments that are already labelled as sustainable, why not endeavour to evaluate and label the entire market? Tackling greenwashing across the UKs financial services is intrinsically linked to our ability to cultivate a brave new environmentally conscious world.
Although it may first appear peripheral, the discourse of sustainable investment is fundamental to wider conversations on the climate crisis. The financial sector has both an opportunity and an obligation to establish the foundations upon which a green British economy can be built. Although the more environmentally conscious amongst us will be pleased to know that sustainable investment is firmly on the regulatory agenda for financial regulators, we must recognise that these reforms in their current state do not go far enough.