IA publishes common definitions for responsible investment funds

Out-Law News | 20 Nov 2019 | 5:34 pm | 2 min. read

The Investment Association (IA) has published a set of common terms for defining and categorising funds with a focus on environmental or socially good outcomes.

The guide (24-page / 1.1MB PDF) is aimed at providing clarity and consistency to savers, as the industry currently uses a wide range of terms and phrases in different ways. The IA is also encouraging its members, who collectively manage over £7.7 trillion worth of assets, to identify which funds should be classed as having responsible investment characteristics to help further improve market clarity.

Investment funds expert Alice Bell of Pinsent Masons, the law firm behind Out-Law, said that the IA's guide "should help to resolve current issues in the UK around marketing and selecting ESG investments" ahead of EU-level plans to introduce a standard taxonomy. ESG refers to environmental, social and governance factors.

Bell Alice_November 2019

Alice Bell

Senior Associate

The IA's framework provides managers, advisers and investors with a uniform approach to defining and categorising ESG products.

"Currently, investors and their advisers can struggle to identify and compare ESG products due to the inconsistent terminology used across the industry," she said. "The IA's framework addresses this problem by providing managers, advisers and investors with a uniform approach to defining and categorising ESG products."

The IA's guide provides standardised definitions for a number of terms commonly used to describe responsible approaches to investment including ESG integration, stewardship, impact investing, exclusions and sustainability focus. It also provides examples of terms and products which fall within each approach. Some of these will be adopted at firm-level, while others will be adopted at fund-level.

The IA received responses from 44 member firms representing £5 trillion worth of assets under management, as well as other industry associations, asset owners and a UK government task force. Responses were generally in favour of its proposed definitions, with 93% of respondents agreeing or in broad agreement with them.

The framework is accompanied by a report setting out the key issues, an overview of the IA's consultation, outstanding questions on disclosure and next steps for the industry.

The IA intends to publish statistics on funds with responsible investment characteristics later in 2020, based on identification by its members.

IA chief executive Chris Cummings described the guide as "a new milestone in making it easy for people to choose a responsible investment".

"The investment management industry can now give its customers a clear picture of the opportunities available to them and the confidence that their chosen product matches their expectations," he said.

The guidance was also welcomed by the Financial Conduct Authority (FCA), which warned last month that it was treating 'greenwashing' of financial products as an "active area of focus". Greenwashing is a term used to refer to firms making misleading claims about the positive environmental impact of their products.

Christopher Woolard, the FCA's executive director of strategy and competition, said that the regulator was "working to enable firms to manage the risks and opportunities from moving to a low carbon economy as well as setting expectations around the creation of green financial products for consumers".