Ensuring ESG product labelling is fit-for-purpose for advisers: RIAA
Any changes to product labelling for sustainable funds must be applied consistently across investor channels, including those used by financial advisers, according to the Responsible Investment Association of Australasia (RIAA).
In July, Treasury announced a consultation into the labelling of sustainable funds and how they could be made easier to understand given the large volume of different and conflicting labels that currently exist.
A new system would help investors to have confidence in the claims made by product issuers and ensure they can confidently compare products, Treasury said.
In its response to the consultation, RIAA said the new labelling regime must be fit-for-purpose to accommodate access for investors across all sectors, including financial advisers, as they have a critical role in helping retail investors to understand and choose products that align with their financial goals and needs.
“The regime should accommodate both direct retail investment and investment made through financial advice channels and all retail client platform channels, ensuring clarity and consistency for all retail participants (i.e. both direct and indirect). This includes standardising the criteria and disclosure for relevant sustainability-labelled products,” it said.
“The regime must be accessible to consumers and retail investors seeking information with or without financial advice. It may be helpful to distinguish responsible investment approaches that directly impact the investable universe – such as thematic investing, impact investing, and some forms of screening – from those that do not, like ESG integration and stewardship.”
Meanwhile for wholesale investors, RIAA suggested the labelling regime should also apply to them to ensure transparency and alignment across the entire investment lifecycle as many retail products were based on existing wholesale ones.
Speaking to Money Management at the time of the consultation’s launch, Dugald Higgins, head of responsible investment and real assets at Zenith Investment Partners, suggested there is such a low level of consistency and clarity around responsible investment labels that they have become somewhat irrelevant for advisers.
“We suggest that advisers are sometimes better to ignore the labels, at least initially, and focus on what a fund is doing. Is it using ESG as a standard decision-making process, or is it going further by also looking at sustainability issues and real-world outcomes to shape an investment’s objective?”
RIAA also flagged a concern around labels for multi-asset funds which may include multiple types of funds or sectors, based on anecdotal experiences from fund managers in the UK and Europe. Therefore, applying a blanket rule could create a risk of greenhushing for those providers.
“The application of a labelling regime to multi-asset products was a consistent concern raised by RIAA members. This was informed by insights (directly from RIAA members as well as through commentary) from funds operating in the UK and EU which use regimes that do not comfortably apply to these types of products.
“For example, multi-asset products in Australia often blend RI strategies, include a range of sectors, invest in listed and unlisted markets, and contend with a lack of usable data across some asset classes. These aspects can make it difficult to meet requirements such as the SFDR’s Do No Significant Harm and Principal Adverse Impact reporting requirements and align with SDR’s prescriptions.
“Even if a multi-asset product provider has positive intent and objectives with their investments making an important contribution to our transitioning economy and meeting the values and needs of consumers and retail investors, it may fail to meet the technical requirements of either regime.”
Other recommendations by RIAA included the adoption of a principle-based labelling regime, specific disclosure for non-financial objectives, avoiding prescriptive product categorisation, and avoiding prescribed responsible investment approaches.
AUTHOR
Laura Dew
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