Industry bodies are aligning with key definitions of sustainable finance to provide greater “consistency and clarity” to end users.
As investors’ approaches to ESG and sustainability-focused investing become increasingly varied, there is a greater need for consistency and clarity in related terminology to avoid confusion and prevent greenwashing.
“Over the past decade, an increasing number of investors have become interested in investment products that align with their personal values or social objectives,” said Chris Fidler, Senior Director of Global Industry Standards at the CFA Institute. ESG.
“Over the same period, there has been an explosion in the availability of information regarding environmental, social and corporate governance practices.
“The combination of these factors enabled the investment management industry to develop new approaches and improve existing ones.”
As fund managers evolve their own definitions and strategies for their products, this makes it more difficult for end users, such as asset owners, to effectively compare ESG-labeled funds and identify the best performing ones.
In Octoberthe European Securities and Markets Authority (ESMA) has published research which showed that funds with an ESG-related label attract higher inflows. The increasing use of ESG-related language in fund names and documentation without transparency and underlying evidence increases the risk of greenwashing, ESMA warned.
In November 2021, the International Organization of Securities Commissions (IOSCO) said it is necessary for the global investment industry to ‘develop common terms and definitions related to sustainable finance’ to ensure consistency.
To address this, the Global Sustainable Investment Alliance (GSIA), the UN-convened Principles for Responsible Investment (PRI) and the CFA Institute published a report on November 1 report which outlines aligned definitions for five terms: screening, ESG integration, thematic investing, stewardship and impact investing.
The joint report recognizes the need for “much greater consistency and clarity in defining a variety of sustainable and responsible investment approaches in today’s market,” James Alexander, chairman and CEO of the GSIA of the UK Sustainable Investment and Finance Association (UKSIF) told ). ESG.
The premise for the work of the GSIA, PRI and CFA Institute was to consider existing definitions within the sector and “find points of convergence and points of divergence,” said Elidh Wagstaff, Senior Specialist in PRI’s Investor Guidance Team.
“From that point on, it was a matter of figuring out how to get on the same page in a clear way,” she said.
Each definition includes a detailed explanation, a list of definitions from organizations that served as primary input, and additional guidance for using these definitions in practice.
It further aims to avoid confusion about what these responsible investing strategies aim to achieve by differentiating the objectives of the approaches, such as ESG integration versus impact investing.
“It was also important to keep the definitions clear,” Wagstaff said, noting that – especially for retail investors – it is crucial that the end user is not “blasted with jargon”.
To increase clarity, rather than listing criteria for product labeling or categorization, the document has attempted to outline the concepts that define each responsible investment approach, which Wagstaff said “allows for an element of flexibility.”
The GSIA, PRI and CFA Institute have defined ‘screening’ as a process of determining which investments are or are not allowed in a portfolio.
Screening rules can be based on qualitative and quantitative criteria, the report said, such as whether the issuer is part of a specific ESG-related index or whether more than 10% of an issuer’s revenue comes from production and/or sales of tobacco. Products.
“Thresholds are an essential part of any quantitative screening criterion,” the report said, noting that thresholds can be absolute, relative or relative to peers. For example, the report noted that an investor with a Scope 1 CO2 emissions screen can use carbon neutrality (absolute threshold), 200 tons per $1 million in sales (relative threshold), or average industry carbon intensity (relative to comparable Bumps). .
These updated definitions also apply outside listed companies.
“It was important that we made sure we understood the essence of each approach and what we were focusing on [our definition] is appropriately applicable to different types of investment strategies and asset classes in both public and private markets,” said Wagstaff.
Toby Belsom, Director of Investor Practices at the PRI, noted that it is “unlikely that this work will end greenwashing on its own,” but that it should nevertheless serve as “a very useful tool to help investor members avoid to ensure they provide a clearer picture of what they do and ensure that information about products is not presented in a misleading manner.”
UKSIF’s Alexander said the three organizations are “optimistic” that the report will serve as a valuable contribution to regulators and the investment industry’s ongoing efforts to “create a more common language” around sustainability-focused investing.
“We hope it will support global policymakers’ ‘live’ discussions on their approaches to the disclosure regime and fund labeling – particularly in the UK, EU, US and elsewhere – and help harmonize approaches that remain critical to the industry and customers. they serve,” he added.