Podcast: The Devil is in the policy detail-the role of intermediaries in greening the financial system

Last year, The Financial Inclusion Centre published a major report called Time for Action – Greening the Financial System. We are following up that report with a project called The Devil is in the policy detail – will financial regulation align financial market behaviours with climate goals? We are hugely grateful to the Friends Provident Foundation for supporting both projects.

As part of that follow up project, The Financial Inclusion Centre has been running a series of podcasts to help explain the key issues in relation to financial regulation and the climate transition.

The first four podcasts looked at regulation in overview, then specifically at the work of the Bank of England and the PRA in terms of prudential regulation and the transition, at the FCA and European regulation including the taxonomy and fund labels, and finally climate disclosures by companies and the future role of auditing.

In the second part of this series, we wanted to bring in some outside voices and to understand some of the practical challenges facing investors, pension scheme members, advisers, fund managers and data providers.

In the following podcast, we look at the role of intermediaries in the broad sense of the word.

This podcast, chaired by financial journalist John Lappin, features an in-depth discussion with Anastasia Guha, global head of sustainable investment at investment consultancy Redington, Anna Pollins, managing director at advisory and wealth management firm Fairstone Group and Rebecca O’Connor who is head of pensions and savings at Interactive Investor who has just published a guide to sustainable investing.

In their different ways, all three are involved in helping to advise people about sustainability and the climate transition – respectively in terms of pension funds and trustees, by supporting financial advisers in helping their clients and through helping self-directed investors.

Scale of the challenge

We wanted to give you an idea of their views below. We first asked out panel to consider the scale of the challenge.

Guha said the biggest challenge was the sheer scale of the information coming at clients who had to avoid the risk of greenwashing and to understand how to achieve a good outcome both financially and from a sustainability perspective.

Pollins said the various definitions are a big challenge. She said that advisers’ approach should be on educating clients but not to push their views on them.

O’Connor added that Interactive Investor had moved from using ethical to sustainable as a label and suggested it was becoming more widely understand certainly in terms of climate change if not perhaps the other sustainable development goals.

Awaiting the labels

Pollins said in the retail market, there was a need to proceed with caution partly because we were yet to see the FCA’s consultation on fund labels. It also had to be considered in the context of various rating agencies and consultancies taking different approaches. For now, there was a sense of the advice sector keeping its powder dry. Advisers did not want to move swiftly in one direction only to see the regulator then embrace a different approach.

O’Connor said there was a lot of cynicism about some of the marketing claims being made, and a danger of things being derailed by greenwashing, but at the same time genuine efforts were being made by many asset managers to offer decent sustainable solutions. Of course, investors also faced a huge number of conflicting priorities with inflation, the cost of living, market volatility and the war. It was, overall, “a very difficult time for people to make choices about their own money”.

She added that it was important that we closed the expectation gap where disappointment could potentially set in. She felt part of the answer was to discuss the underlying investments often in strong, well-established sectors such as tech, education and healthcare.

Open not closed

Pollins stressed the need for advisers to deploy some really good open questions to understand investors’ preferences particularly in a period of high inflation and lower returns. With closed questions there was a risk of driving clients to a particular solution.

Shades of green and brown

Guha said they did sometimes take a bucket approach suggesting types of assets were deep green, light green and brown and potentially unacceptable as a way of discussing things with trustees who are not typically climate change experts.

“Then we can say here are the advantages and disadvantages of each of these buckets. You can say these are the deep green funds. These are the disadvantages of investing in them. And these are the advantages. It’s then up to the client to decide their own risk appetite.”

Pollin added that internally they talked about shades of green but were encouraging advisers to talk to clients first from a top down, values-perspective and then often to move to discussing more bottom up approaches in terms of themes including impact.

She was concerned about ESG meaning a lot of different things to different people. Their approach was to ask clients do you have any preferences in terms of having a positive impact or avoiding a negative impact.

Data issues

Guha said that one concern for now was a need for better reporting from underlying companies and ideally that needs to be standardised for a UK, German or Japanese company.

“What is actually happening now is that there’s so much data of different types provided by different people, that you don’t know exactly how to judge a fund manager on how they’re using this data.”

Pollins added that it would be really positive if the ratings agencies and the ratings caught up with developments. Their approach for now, was if a client had a very strong preference, was to find the right specialist fund manager.

O’Connor did have concerns that while the big firms had teams to meet the new data requirements some of the mid-sized stocks might struggle despite often doing the right thing. She was concerned this could limit the universe of stocks.

Looking at the future

For the future, O’Connor said the big challenge was going to be meeting targets across the whole of the economy. But she wanted to see more competition among asset managers because, she said, the investor demand is there.

Pollins added: “The younger generations are more aware, and in their daily lives are holding more companies to account as more data is available and not simply from an investment perspective. We should be able to use capital to effect positive change. Yet even with changes in regulation, it will take time for things to bed in. I hope it can speed up and we build more confidence in investors in directing their money into this area. It should be good investment practice. It shouldn’t be a niche.”

Guha said that the speed and the scale of the uptake in the past few years had been incredibly intense. “On the institutional side, there’s no turning back.

She added that we may see two really interesting developments. We could see the next Apple or Google coming from the sustainable impact space while she felt that a lot of the data issues including relating to companies could be put to bed by 2025.

Please give the podcast a listen. We hope it is informative and interesting. The next pod looks at data in more detail. If you have any questions or would like further information on the overall project, please contact Mick McAteer on mick.mcateer@inclusioncentre.org.uk or mickmcateer92@gmail.com