((L-R) Herold, Yelton, and Willman.

The road to streamlined, cohesive labelling frameworks and disclosure regimes will be bumpy, and friction and additional costs are to be expected – but whether it’s simply a marketing ploy is still up for debate.

This was the view shared in a Clear Path Analysis report, based on a webinar “Maximising visibility in ESG regulatory reporting through the investment chain”, which saw several key industry figures discuss topics including what they feel is hindering implementation of investment label blueprints for the industry globally. The report also covered a host of other factors, and including how understanding nuance around reporting and sustainability measures could be key to implementing successful investment strategies in a future of heavy ESG-compliance.

The figures, which included Thomas Willman, Senior Researcher (Regulations), Clarity AI, Hannah Herold, Director of Sustainable Research, American Century Investments and Glen Yelton, Head of ESG Client Strategies, North America and EMEA, Invesco, as well as representatives from Manulife Investment Management and Legal & General, also shared their views on a fundamental question – are labelling regimes simply a marketing ploy or do they serve a real purpose to help streamline internal and external information.

It’s something that’s divided the industry and one that regulators are cracking down on. In a January 2023 blog post from LSE, the author argued that “Marketing is killing ESG”. “Businesses are scrambling to signal compliance with ESG (environmental, social, and governance principles). However, as ESG entrenched itself in the mainstream, it lost much of its original meaning and impact and became more of a marketing tool,” said Ricardo Vargas, author of the blog.

While at the end of 2023, it was reported that UK asset managers will be banned from using ‘vague references’ to sustainability, according to the FT’s report on the Financial Conduct Authority’s (FCA) actions on it.

“The new anti-greenwashing rules that could lead to a significant shake-up of the $250bn sector,” said the FT. “The FCA said its regime laid out two days before the start of the COP28 climate summit in Dubai, was intended to make sure products marketed as helping either people or the planet were “clear, fair and not misleading”.”

Below, the panellists give their views on the topic and whether it feeds into potential mislabelling and misrepresenting or whether it’s vital to a growing industry.

Maya Sibul: Let’s focus on the aspect of the fundamental basis of the purpose these frameworks serve. Are labelling requirements mainly marketing ploys?

Glen Yelton: I may get flack for this, but at the end of the day, every label does have a marketing element to it. That’s what a label is; it determines how you differentiate a particular product from a suite of products on the shelf.

The problem we have is that there are labels that people have leaned into heavily, where they have misrepresented what they are delivering. We need to avoid this mispackaging of deliverables.

The companies that take it seriously are the ones that have the dialogue with regulators. Those that do this, and have done it for a while, know that these conversations have to be had alongside label construction.

Hannah Herold: I am not condoning mislabelling or misrepresenting, but I do feel that there is a distinction between doing it intentionally and not. We have all said that this process takes resources, time, and understanding to adhere to these regulations and understand these labelling requirements, which means there will be a transition period.

Firms need to understand what is going into these labels so that they are not misrepresenting. We have recently seen with the changes in SFDR – where we’re getting reclassifications from Article 9 to 8 – that as there is greater clarity from regulators, adjustments are made.

We also need to consider market nuances. For example, you have emerging companies, or small cap companies, and need to know what that means and how the frameworks can be fair for all players. Priorities also differ regionally. For example, the US tends to be more focused on some of the social issues, whereas in Europe climate is a priority. Then you have Australia, which is focused on the modern slavery issue with the Modern Slavery Act.

These variations come into consideration not only with reporting and disclosure but also with client needs.

Thomas ‘Tom’ Willman: Labels can certainly be used as marketing tools, and the European example is perhaps the most acute. Whilst not labels per se, we’re still seeing a huge move away from Article 6 classification due to a fear of being invested in stranded assets.

In a paper we recently published, we looked at Article 8 funds, and one of the hypotheses we investigated was whether the category was becoming a catchall. This is hard to prove, but we do know that there is a wide spectrum of sustainability attributes within that category, and we found that 75% of those funds do not mention sustainability or ESG in their names at all.

Yes, the devil is in the details – and the prospectuses might have additional information – but because investors are so reliant on fund names when selecting investments, this discovery was striking.

Still, we do have a responsibility to engage with these processes. Today, I attended an ESMA hearing on proposed changes to SFDR, and this was a welcome engagement with the market.

To see more of the group’s thoughts, and read the report in full, please click here.

 

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