The Investment Association (IA), the trade body for UK fund providers, is looking to clarify the terms the industry uses when talking about responsible investment products such as environmental funds.
The IA says that responsible investment, which can involve addressing concerns about issues such as climate change, is now a key trend in the development of new funds. It added that concerns about the environment, a desire for private finance to drive positive social change and an expectation that investment managers should hold companies to account, were driving the development of new and existing funds.
“A key trend in terms of the evolving product set, as well as the underlying investment process, is the growth of responsible investment,” it said. “This builds on environmental and social themes as well as on more traditional stewardship activities such as corporate governance oversight and engagement.”
However, the IA warned in its latest annual survey of the investment industry that the terms used for different forms of responsible investment remained “inconsistent”, and said it would look to categorise these more clearly in its future work.
“The inconsistency in the definitions of the various approaches to responsible investment and interpretation of those definitions means that data collection [on fund flows] is particularly challenging,” explained the IA.
And with regard to social impact investing, the trade body said it was “pursuing its own proactive work and has been engaging in extensive consultation on industry agreed definitions and potential product labelling options".
The IA has started to use the Global Sustainable Investment Alliance’s definitions of different responsible investment approaches, and said it would publish a framework on common approaches in this area in future. The definitions, set out in the table below, include funds with a focus on sustainable investments and ones that exclude certain investments from their investment process based on environmental, social and governance (ESG) criteria.
This year’s IA survey found that 26 per cent of the assets under management covered in its research were invested using a responsible approach. Negative screening, which involves excluding certain companies or sectors, was the most commonly used responsible approach, with £735bn or 10 per cent of assets invested in this way. Positive screening was less widely used, with less than 1 per cent of assets invested in this way.
Responsible investment has been growing in popularity over recent years. Schroder Investment Management’s 2018 Global Investor Study found that 76 per cent of respondents said sustainable investing had become more important to them in the past five years. And fund providers are increasingly focusing on this area. Earlier this month, Fidelity International launched a range of sustainable funds, focusing on areas such as reduced carbon output and sustainable water, and Heartwood Investment Management has launched a range of sustainable multi-asset funds.
Investment platform Interactive Investor, meanwhile, has recently published a list of funds it offers that have a focus on social and environmental issues.
But responsible investment continues to confuse investors because there are so many different products are on offer, with little standardised information and some terms used interchangeably. For example, Schroders' survey found that 9 per cent of respondents did not understand what sustainable investments were, and 22 per cent were not sure which investments took a sustainable approach.
The Global Sustainable Investment Alliance definitions of responsible investment
| Category | Definition |
| Integration of ESG factors | The systematic and explicit inclusion by investment managers of environmental, social and governance factors into traditional financial analysis. |
| Negative/exclusionary screening | The exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria. |
| Positive/best-in-class screening | Investments in sectors, companies, or projects selected for positive ESG performance relative to industry peers. |
| Norms-based screening | Screening of investments against minimum standards of business practice based on international norms. |
| Sustainability-themed investing | Investment in themes or assets specifically related to sustainability (for example, clean energy, green technology, or sustainable agriculture). |
| Impact/community investing | Targeted investments, typically made in private markets, aimed at solving social or environmental problems, including community investing. |
Source: Investment Association
