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IA to enforce clearer definitions of ethical funds

Proposed new rules could mean better and consistent definitions of ethical funds
IA to enforce clearer definitions of ethical funds

Funds that take ethical, sustainable and responsible investment approaches may have to meet stricter definitions and be clearer about what they do under rules being considered by the Investment Association (IA), the trade body for asset managers.

The current system does not prescribe definitions for responsible investment strategies, meaning asset managers can label funds and define their process as they see fit. This means that although there are many ethical, sustainable and responsible funds to choose from, as they do not have to meet a set definition it can be hard to compare them to each other.

Ethical investment refers to a myriad of strategies. These include screening out investments based on their environmental, social and governance (ESG) record, investing under ethical guidelines, investing with climate or sustainability screens, and aiming to make a positive impact. However, there is no definition of what constitutes ESG, ethics, or what is meant by responsible or sustainable investing.

The IA is now consulting on creating standard definitions for these terms and will also develop a label for funds that have adopted ethical, responsible and sustainable investment strategies, so investors can identify them more easily.

The IA has also suggested amending the way asset managers report to investors so that they disclose how they incorporate ESG factors into their investment processes and the impact their investments have on wider sustainability indicators. This should make it easier for investors to identify funds that take the ethical approach they want.

"With sustainability and responsible investment becoming an increasing priority for investors, this consultation is an important step forward in gathering the views of the industry with the aim of bringing greater clarity to investors," said Chris Cummings, chief executive of the IA. "It is our role to help today’s investors achieve both their financial, and their environmental and social goals."

But some analysts don't think the proposals go far enough. Moira O’Neil, head of personal finance at investment platform Interactive Investor, said the lack of standard definitions was holding back the investment style.

“The ethical funds sector has grown and yet disappointingly stayed the same," she explained. "It’s no surprise that the sector has failed to make it into adolescence given there is still no sector for sustainable funds and the industry doesn’t seem to agree on what to call them. It makes what should be a straightforward task an uphill struggle, even for experienced analysts.”

Laith Khalaf, senior analyst at broker Hargreaves Lansdown, said: “There’s an oppressive amount of jargon around. Standard definitions may help, but there’s no one size fits all when it comes to investment strategies, so for me you can’t beat simply explaining what a fund does on the tin in plain English.”

The number of ethical, sustainable and responsible investment funds and the value of assets within them have grown considerably over the past decade. However, these funds' market share of overall fund volumes has not grown much.

However, the IA says that sales of ethical funds were good in 2018, which was not necessarily the case with other types of funds. Net retail sales of ethical funds were £1.1bn over the first 11 months of 2018 – a record amount. Ethical funds accounted for over 12 per cent of all sales over the first 11 months of 2018, a sharp increase on the 2 per cent of sales they accounted for in 2017.