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The Association of Investment Companies (AIC), the trade body for the investment trust industry, has proposed that demanding standards should be set for funds that call themselves “sustainable” or make ESG claims. This includes the UK listed investment company sector, it argues.

In its response to the FCA’s discussion paper ‘Sustainability disclosure requirements and investment labels’ (DP21/4), the AIC also argues that product labels should distinguish between products that focus on environmental sustainability and those targeting positive social change, though it would be possible for a single fund to carry both labels if it met the standards.

Finally, the AIC recommends that the same standards are applied to all retail investment products that fall under the PRIIPs and UCITS fund distribution regimes, including investment companies.

Why has the FCA become concerned?

Currently there are still far too many funds claiming ESG credentials which are far from doing what it says on the packet. This forced the FCA to issue a ‘Dear Chair’ letter (the regulator’s usual means of firing a warning shot at the fund management industry) warning about misrepresentation of ESG investment strategies.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “People buying investments that are labelled ESG or sustainable expect them to make a real difference, rather than being a marketing opportunity for product providers. Unfortunately, we are still in a situation where too many ESG claims do not stand up to scrutiny, as the FCA has already highlighted. This threatens to undermine investors’ confidence in ESG investing as well as getting in the way of positive change.”

Stone says the bar for investment products to call themselves sustainable should be set high enough to clearly differentiate them from other products. Product labels should be clear, and disclosures should be short and jargon-free. It’s also important that investors know whether those products are focusing on environmental sustainability, social issues, or both.

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Finally, rather than the FCA’s new disclosure regime applying to some products but not others, all retail investment products should be within the scope of the regime including investment companies.

Why is the investment trusts sector important for ESG investing?

“Investment companies are well placed to invest in less liquid assets that can have a large environmental or social impact: for example, our Renewable Energy Infrastructure sector raised a record £3.4 billion last year,” Stone added. “They should be held to the same standards as other investment products so that investors choosing an investment for its sustainability credentials can compare like with like and have confidence that the label is meaningful.”

The FCA has said it has seen a high number of new applications for funds from managers which want to tap into the demand from investors for ESG products. It has become concerned, however, by what it calls the number of “poor quality fund applications…and the impact this may have on consumers.” It says it plans to continue to build investor trust in the market, and that it expects fund management firms to play their role in this as well.

“Where consumers find it difficult to assess whether authorised funds meet their needs and preferences…there is potential to undermine trust and deter consumers from this segment of the market,” the regulator warned CEOs.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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