Why not Fairtrade finance?

We like to buy Fairtrade coffee. Why not Fairtrade finance, asks Steve Waygood.

A Fairtrade-style kitemark for responsible investment is in the pipeline. It should improve industry standards on environmental, social and governance (ESG).

Death, philosophy, the afterlife: for a television comedy, The Good Place explores some weighty themes.

The Netflix series follows the adventures of four characters who try to become better people to earn ‘points’, or karmic rewards. It slowly dawns on them that the complexity of the modern world makes it fiendishly difficult to behave ethically.

This is a theme we can all identify with. High-tech gadgets, just-in-time supply chains and globalised markets have made life more convenient. But they have also made it more complicated?

  • Do you know how the metals in your smartphone were mined?
  • How are employees treated on the coffee plantations that grow your Arabica beans?
  • Is your pension invested in companies that damage the environment?

Some industries have solved this by introducing commonly agreed standards, providing reassurance that minimum guidelines have been observed. For coffee-drinkers, the Fairtrade label means they can sip their morning latte with confidence it has been ethically sourced.

For too long, finance has lacked a set of publicly available standards of its own.

If consumers want to make sure their savings are invested responsibly, it has been difficult for them to get a clear idea of the products on offer. But this is about to change.

Working with Aviva Investors and others, the British Standards (BSI) Institute is developing a kitemark that can be used by asset managers that meet voluntary standards on responsible investment.

Think of it as Fairtrade for finance. 

Ivory towers

Until now, the debate about responsible investment has typically been held in ivory towers. The end investor has had little or no insight into decisions taken with their money.

Disclosure of ESG criteria has improved in recent years. But it remains hard for individuals to know precisely how their capital is invested, and how those investments impact on the wider world.

Part of the problem is the inconsistent application of ESG-related terms. ‘Negative screening’ is a prime example. The phrase can refer to a wide range of filters used to exclude a variety of different assets from funds.

Fairtrade for finance

Thankfully, the industry is waking up to the problems a lack of common standards on responsible investment bring. Progress is being made on a number of fronts.

Firstly, the BSI plans to launch its kitemark within the next 12 months. And, separately, the Investment Association is consulting on proposals for sustainable investment products.

In addition, the Financial Reporting Council and Financial Conduct Authority have recently published consultations on revisions to the UK Stewardship Code. The new code aims to increase demand for more effective stewardship and investment decision-making, aligned to the needs of institutional investors and their clients.

The BSI project is working to create two sets of voluntary standards. A sustainable finance framework to establish a common language and high-level principles across the industry. Second, is a sustainable investment management framework, which will set out requirements for market participants, with robust oversight mechanisms built in.

Properly implemented, the kitemark will give consultants, institutional investors, advisers and individual investors an easy way to identify managers that meet minimum standards of integrity – from fee transparency to voting and engagement.

The average end investor typically lacks the time and expertise to find or make sense of this kind of information. A simple kitemark on fund marketing materials that flags which managers are doing the right thing will be a big step forward.

Transparency and harmonisation

Nevertheless, it is only a first step.

As standards are introduced, industry participants should work towards greater international coordination and harmonisation.  

While some might argue that a raft of national standards is better than none, too many competing labels will generate inconsistency and confusion. Rather than incentivising a race to the top, competing standards could lead some to gravitate to whichever guidelines are least onerous to follow.

Ultimately, the International Organization for Standards (ISO) should create a coherent framework for global standards and provide the proper oversight. The ISO has already accepted a proposal from the BSI to develop a technical committee that is likely to build initial proposals in this direction.

Like the characters in The Good Place, end investors have been in the dark for too long about the ethical ramifications of the decisions made in their name. But by creating a system of transparent and recognisable standards, the finance industry has the opportunity to help us all tally up a few more points in our favour.

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