“High” standards for ESG labelling required to avoid misuse, says AIC

Sustainable investingThe Association of Investment Companies (AIC) has said that high standards should be met if funds are going to call themselves “sustainable” or use the ESG label.

In response to a Financial Conduct Authority’s (FCA) discussion paper - ‘Sustainability disclosure requirements and investment labels’, the UK trade body argued product labels should distinguish between those that focus on environmental sustainability, and those that target social change.

The AIC has said it would be possible for a single fund to carry both labels if it met the standards. It also recommended that the same standards be applied to all retail investment products that fall under PRIIPs and UCITS systems, including investment companies.

“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,” said Richard Stone, chief executive of the AIC.

“This threatens to undermine investors’ confidence in ESG investing as well as getting in the way of positive change,” he added.

According to Stone, for investment products to call themselves sustainable, a high bar should be set so as to differentiate them from other products. Product labels should also be clear and disclosures short and free of jargon, he said.

According to the proposals, the labelling system must “require that demanding standards be met which create a material distinction between investment products which benefit from product labels and those which do not.”

Investors must also know whether certain products are focusing on environmental sustainability, social issues, or both.   “...Rather than the 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,” said Stone. “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 discussion paper and the subsequent AIC proposals to ESG labelling follow mounting concern over incidences of greenwashing across the asset management industry.

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