Dozens of investment giants miss out as watchdog bolsters ethical fund standards

One of the few real areas of growth for fund managers in recent years has been in the field of so-called ESG investment – ESG standing for environmental, social and governance.

In essence, this is the concept of investing sustainably, targeting those businesses that pay greater attention to their environmental and social impact.

It evolved from the field of ethical investment whereby fund managers avoided investing in sectors such as tobacco, arms or pornography.

Billions of pounds have flowed into the sector. According to the Investment Association, the industry body, the amount of money going into ESG funds during 2020 was quadruple the amount invested in 2019.

Much of this money came from younger investors who are more focused on issues such as climate change and inequality than older investors.

It has been lucrative business for those asset managers who have come under pressure from low-cost tracker funds that simply seek to replicate the performance of stock indices such as the FTSE 100 or the S&P 500.

Some of them, however, now have a bit of a headache.

The Financial Reporting Council, the main watchdog for the audit and accounting industry, has revised its Stewardship Code – its industry benchmark that sets stewardship standards for the asset managers, pension schemes and insurers on behalf of Britain’s savers.

The FRC defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”

Previously, fund managers had merely to provide the watchdog with a statement about their stewardship.

This year, however, the FRC has required the fund managers to provide detailed evidence of how their actions complied.

The reason for this is that, with more money coming into the field, it feels that the expectations of investors have increased.

The FRC feels that, as a result, the quality of reporting needs to improve. It felt that, previously, too many firms were providing what it described as “boiler plate” statements that it said did little to show if investors were getting value for money.

The tougher standards mean that a number of well-known asset managers have failed to become successful signatories to the revised code.

They include Schroders, one of the UK’s biggest and best-known asset managers. Also missing from the list are a clutch of other industry heavyweights that include Columbia Thredneedle, T Rowe Price and Allianz Global Investors.

In all, the FRC said, 64 firms of the 189 who applied to become signatories to the code had failed to do so.

Sir Jon Thompson, chief executive of the FRC, said: “This list demonstrates our continued commitment to serve the public interest as we transform to becoming a new regulator. We are proud of our robust approach to assessment and encourage those who have been unsuccessful to reflect on our feedback and apply again in future.”

Unsurprisingly, the clampdown at the FRC – which has been seeking to toughen up following a series of government-backed reviews after a number of accounting scandals – has caused some disgruntlement among asset managers.

Schroders, for example, has been quick to make clear it did not make the list of signatories because of the “format rather than substance” of its statement.

But the timing of this announcement is doubly interesting because it comes at a time when ESG investors are under the spotlight like never before.

Tariq Fancy, the former head of sustainable investing at BlackRock, the world’s biggest fund manager, has just published a damning essay on the online publishing platform Medium in which he wrote that a lot of ESG investing is not actually useless, but also damaging.

His detailed critique included suggestions that ESG investing does not produce the positive outcomes that a lot of its supporters claim that it does and that the investment timescales deployed by ESG investors is shorter than the timescales required to tackle issues such as climate change.

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Since then, the main US financial regulator, the Securities & Exchange Commission and its German counterpart have opened an investigation into whether DWS, a large German fund manager previously part of Deutsche Bank, lied investors about its ESG practices. It followed accusations of ‘greenwashing’ by its former head of sustainability.

Gary Gensler, the chairman of the SEC, has gone on to say that the regulator is considering whether to make fund managers provide more information about their ESG services.

ESG has undoubtedly represented a fantastic marketing opportunity for asset managers at a time when they were facing greater competition.

It would be unsurprising – not least because of human nature – if some of them had made claims about their ESG services that could not be substantiated or failed to deliver on some of the promises they have made for investors.

The message from what the FRC has announced and from what the SEC has been saying recently is that they are going to have to work much harder on this front in future.

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