‘The future of (sustainable) investment’ – Moneyfacts article

Posted on: August 23rd, 2021

‘The future of (sustainable) investment’ – Moneyfacts article

My thanks, once again, to Investment Life and Pensions Moneyfacts magazine for publishing my article on ‘the future of (sustainable) investment.’

The article is a roundup of the important regulatory developments that are emerging in this area – as well as the need for urgency in switching all investments onto a sustainable footing.

The piece finishes with a few reflections on the fact we currently have the luxury of  both ‘hope and fear’ for our futures … which, given what we are doing to the planet, can not last forever.

You can download the full article here:  The future of (sustainable) investment p16-17Aug 2021


My original (unedited) text is below.


Moneyfacts August 2021 edition

The future of (sustainable) investment

At a recent conference I was asked to comment on the future of sustainable investment. I sought to paint a picture, saying: “… like a sandwich. ESG risk mitigation is the bottom slice of bread – underpinning everything, whereas responsible ownership, stewardship, is the essential top layer – but what you put in the middle can be hugely varied.”

On reflection, that is probably more what I believe all investments should look like – not just sustainable investments.  It is now clear that environmental, social and governance issues present major risks and need careful, active management – irrespective of fund strategies.

As with bread, these essential ‘top and tail’ strategies will vary – although they must all have the same basic aims – however it is the filling that will provide the most obvious points of differentiation, particularly for retail clients.

For the filling, stock selection, clients must be able to see and understand what they are getting.  A fund that is specifically promoted as ‘ESG’ should show how it focuses on environmental, social and governance analysis and risk mitigation.  A fund that is promoted as ‘sustainable’ should hold sustainability solutions companies, transition leaders or both (although exceptions may work if stewardship activity is sufficiently strong) – and ethical funds must show that personal values are at their core. Funds that do none of these should explain what it is they do.

Beyond these strategies, funds that hold companies that fall outside of sustainability options, are however not going to vanish overnight, which makes it important that all asset owners and managers ensure progress is made across the board.   After all, if we are to benefit from the green revolution that is taking shape, we need polluters to be ‘encouraged’ to stop polluting.

International challenges

The recent, terrifying fires in Canada and Siberia, and the floods in Germany and China point to the international nature of sustainability problems – and the need for global solutions.

And indeed we are now seeing a flurry of activity. The international standards body IOSCO (International Organization of Securities Commissions), which the FCA is part of, is consulting on sustainability related regulatory and supervisory expectations in asset management.  (This all links through to the G20 and the FSB (Financial Stability Board) which are increasingly focused on climate risk in particular). The outcome of this work should be far better corporate reporting and improved company specific data on issues like carbon emissions and climate risk.

With COP26 just around the corner, the UN’s high profile ‘Race to Zero’ campaign is also gathering pace.  Over 4,500 organisations have now signed up. Their roadmap sets out the need to reduce emissions by 7% each year to achieve a 50% reduction by 2030 – which makes net zero by 2050 and capping temperature rises at 1.5 – 2 degrees centigrade theoretically achievable.  (My hesitation is because we are already at +1.2C).


And there is much more going on of course, for example the BSI has started work on a fund standard  – which I am delighted to now be involved with – on the PAS 7342 steering committee.

UK government led activity

As mentioned previously, the FCA has significantly ramped up their work in this area recently in part as their new ‘remit’ (from the government / Treasury) now directs them to help meet the UK’s climate change targets.    Their recent focus has been the international listing standards work at IOSCO and embedding TCFD into UK markets, but the last few weeks have been momentous.

The Chancellor of the Exchequer referenced this area in his Mansion House speech (and related documents) on 1 July, heralding “a new chapter for financial services” adding: “We’re launching new requirements for businesses and financial products to disclose sustainability information…”.

The FCA’s business plan went further two week later with an ESG section saying they want to achieve the following outcomes:

FCA Business Plan 2021-22


  • high-quality climate – and sustainability-related disclosures to support accurate market pricing, helping consumers choose sustainable investments and drive fair value
    • promote trust and protect consumers from mis-leading marketing and disclosure around ESG-related products
  • regulated firms have governance arrangements for more complete and careful consideration of material ESG risks and opportunities
    • active investor stewardship that positively influences companies’ sustainability strategies, supporting a market-led transition to a more sustainable future
    • promote integrity in the market for ESG-labelled securities, supported by the growth of effective service providers – including providers of ESG data, ratings, assurance and verification service
    • innovation in sustainable finance, making use of technology to bring about change and overcome industry-wide challenges

Published 15 July 2021


Four days later the FCA published a ‘Dear Chair’ letter to authorised fund managers (AFMs).  The letter set out their expectations for sustainable investment and ESG funds and included a set of principles describing what they now expect these funds to do.

This idea was first aired at our annual conference in October 2020, under the header ‘improving trust in sustainable investment’.  The final document is largely as expected (and as described here previously). It sets out their understanding of the legitimate complexities and diversity across the ESG and sustainable fund market – and says what is and is not now acceptable.

The introductory text explains that many new fund applications have fallen far short of what they believe consumers may reasonably expect and that fund options (and their communication) must be fit for purpose, true, fair and not misleading. The letter also references the importance of this area to the proper allocation of capital and the need to shift to a net zero economy.

It also explains that there is a broad aim for these principles to compliment the EU’s SFDR and other related initiatives – indicating that the principles lay the groundwork for future developments in this area.

The author, Nick Miller, Head of Department, Asset Management Supervision referenced the various related government aims and initiatives (described above) and indicated their intention to now turn their attention to fund labelling and new economy-wide Sustainability Disclosure Requirements (SDR).

The letter also indicates that the FCA is working closely with HM Treasury, explaining that they are currently consulting on the implementation of TCFD (climate related financial disclosure) alignment disclosure rules for asset managers.

The letter finishes by stating their aim as being to bring clarity for fund managers looking to launch or convert funds – and to ‘enable consumers to make an informed judgement about the merits of investing in a fund’.

The specific ‘principles’ (in the annex) sit under the overarching principle of ‘consistency’ and focus respectively on ‘design’, ‘delivery’ and ‘disclosure’.  The headers for each are below:


FCA ‘Dear Chair’ letter – ESG and Sustainable Investment principles

Overarching principle: Consistency

Principle 1. The design of responsible or sustainable investment funds and disclosure of key design elements in fund documentation

Principle 2. The delivery of ESG investment funds and ongoing monitoring of holdings

Principle 3. Pre-contractual and ongoing periodic disclosures on responsible or sustainable investment funds should be easily available to consumers and contain information that helps them make investment decisions

Published 19 July 2021

Expect further changes

From these developments, and our conversations with the FCA, there is no doubt that sustainability is firmly on the regulatory agenda.

As well as there being two ongoing FCA consultations proposing climate related disclosure rules for ‘regulated firms’ and ‘standard listed companies’, the FCA has also been researching consumer choices and greenwashing, the latter confirmed to them that labelling matters.

And a similar shift has been taking place in pensions also for some time. The DWP has recently been consulting occupational schemes on ‘Governance and reporting of climate change risk: guidance for trustees of occupational schemes’ and The Pensions Regulator (TPR) issued  draft guidance  on 5 July, outlining their approach to new regulations.

So, with the government keen to position the UK as a leader in sustainable finance this area is increasingly taking centre stage – sometimes specifically focused on sustainability funds, sometimes far more widely.

And although current regulations do not appear to reference intermediaries directly there is no reason to believe advisers and platforms will not be ‘in scope’ given their importance. But time will tell.

The highly respectable performance of these funds – as shown in the table – illustrates why this is not an area any intermediary should fear. Generalisations are always risky – but I am very comfortable saying there is no reason to expect underperformance, indeed understanding and responding to risks and opportunities always made perfect sense to me.

Hope and Fear

There is a lot going on in this area, but assuming the principles make these funds easier to understand and promote one of the challenges you may face could be balancing ‘hope’ and ‘fear’ when discussing this area with clients.

Both excessive optimism and gloom can lead people to wonder ‘why bother?’.

The answer is because we are on a knife edge right now – which is why activity is so wide ranging.  Neither governments or investors can address the climate crisis, biodiversity loss or social ills alone. Now that governments are starting to move – at least on climate – investors can legitimately and profitably amplify their action through the financial markets.

Sustainability funds (and similar) are the natural leaders, but risk management and stewardship activity beyond these funds will either amplify or cancel out their good work – as we share a single planet.

The science tells us we have around a decade to start mending our ways.

Like Schrödinger’s cat, for the time being, regulatory developments are allowing both hope and fear to coexist.  We have options.  But at some point, that will change.

Like the planet’s capacity to absorb carbon, the sandwich analogy also has a limited shelf life. If we fail to act swiftly and together, the choices we now take for granted may soon be gone.

Julia Dreblow

Director SRI Services, founder Fund EcoMarket fund tool