ISEAL Alliance

Social and environmental standards have been on the agenda for the investment and finance sector for many years. The focus has been mainly on voluntary standards and helping to manage challenging social and environmental issues. Two of the best known industry-wide initiatives are the Equator Principles and the UN-backed Principles for Responsible Investment .

Investors have helped to develop standards in business practices and have pushed for greater corporate accountability and transparency through supporting projects such as the Global Reporting Initiative (GRI) and investor-led initiatives including the Carbon Disclosure Project and indices such as FTSE4Good.

Research conducted by YouGov found that 49 per cent of British people with savings and investments would like to “make money and make a difference”. According to Eurosif , sustainable investments represented approximately eight per cent of European High Net Worth Investors portfolios as of end of 2007. Eurosif also predicts that by 2012 the share will have increased to 12 per cent. This growth is also being seen in North America, Australasia and more recently in Asia.

How to Recognise Investments that “Make Money and Make a Difference”?

The global financial crisis has heightened concern about transparency and the stewardship of assets. This is leading consumers to increasingly want to invest in the real economy and to know in more depth what they are investing in.

The term “green and ethical investments” looks at the wider impact of investing on society and the environment when seeking financial returns. They take into account social or environmental criteria in addition to financial criteria. Investment choices include climate change funds, sustainable thematic investments focused on social and environmental solutions and screened approaches which positively select investments on social or environmental grounds or avoid them. You may sometimes hear the terms “responsible”, “sustainable” or “socially responsible” used interchangeably with “green and ethical”. Terminology is rarely defined.  

A number of regional labelling and standards initiatives have already been established (see list below).

The Need for Global Certification and Standards for Ethical Investment

The case for further, potentially global labelling and certification systems is best judged by whether it can raise awareness of green and ethical investing and provide consumers with confidence that if they choose an investment “it does what it says on the tin”.

However, would a labelling system for investments be able to replicate the success of an established system such as the Fairtrade mark?

As demand and interest in green and ethical investment grows away from a niche choice, consumers are looking for credible green and ethical options as a practical way they can make a difference.

For a detailed exploration of these questions the following five issues need to be addressed:

1. What to certify?
   The current transparency initiatives (set out below) are process-focussed - they aim to help consumers make informed choices by shining a light on the process and policies of the financial products on offer. If further standards are developed, should they focus on process or would an output-orientated label better build consumer interest and confidence?: for example “my investment is tackling climate change/poverty in the following ways...”. Or does the wide range of issues addressed by green and ethical investing result in an output-focused approach being at best too complex and at worse meaningless?
2. Who to certify?
   Should labels be applied to the product, the product provider and/or the investment sales and distribution channel? For instance, given that many consumers use financial advisers to guide their choices would a “green and ethical investors welcome here” labelling system based on the adviser’s ability to advise on green and ethical investments have more impact than labels at the product level?
3. How to measure social and environmental impact?
   The impact measurement challenges for investment choices have many similarities to other sectors: eg the difficulties of measuring quality and impact over the long term. Similarly, context is important is investing in job creation or environmental solutions in developing countries delivering more green and ethical “bang for your buck” than equivalent investments in the UK?
   
   There are also impact measurement issues specific to investing. Investing in stocks and shares usually means buying and selling the shares of companies on a secondary market with the transaction directly between investors rather than between the purchaser of the shares and the company. This creates additional complexity when measuring the difference an investment can make.
4. Can one size fit all?
   The range of green and ethical investment options is growing and becoming increasingly diverse. This brings questions of comparability especially if assessing global standards. Can the environmental impact and standards of a property investment be meaningfully compared to those of an investment through an index of companies promoting environmental solutions?
   
   The attraction and success of labelling is arguably that when done well it simplifies and clarifies from the perspective of the consumer. Does the nature and complexity of investments preclude successful replication?
5. Opportunity Costs of Labelling
   The fifth issue is the opportunity costs and unintended consequences of labelling. Would a push towards labelling and global standards justify the required energy and resources relative to other models for driving standards, building confidence and growing demand?
   
   Is the timing right for developing a label? Would global standards stifle innovation and disruptive technologies? Green and ethical investments are well established especially in Europe and North America – the first funds appeared more than 30 years ago. However in some senses, green and ethical investing is young and dynamic with the last few years witnessing a step change in attitudes, interest and scope. In this dynamic environment does the inability to classify actually represent success?
   
   Finally, does the idea of labelling take green and ethical investing down the wrong path? If the end goal is to promote sustainable development through financial services, does a label harm the drive to integrate and mainstream social and environmental issues into the financial system?

Conclusions and Invitation

In addressing these issues, the investment community can learn from the labelling and certification journeys of others. I am, for one, keen to learn from these experiences and would welcome your thoughts and ideas on whether, and if so how, labelling and certification can build greater confidence and interest in green and ethical investment.

About the Author

Adam Ognall is Deputy Chief Executive of UKSIF – the sustainable investment and finance association www.uksif.org.

UKSIF coordinates National Ethical Investment Week (7-13 November 2010) the campaign to ensure that everyone knows that they have green and ethical options when it comes to their finance and investment decisions www.neiw.org .

Adam can be contacted at adam [dot] ognalladam [dot] ognall [at] uksif [dot] orguksif [dot] org (adam [dot] ognall [at] uksif [dot] org)

Existing Initiatives

European SRI Transparency Code and Logo

Launched in 2004, the Transparency Code aims to create more clarity on the principles and processes of green and ethical investment funds to help consumers make more informed choices, as well as to encourage best practice amongst product providers.

Signatories to the Transparency Code provide detailed information on investment criteria, research processes and engagement and voting policies. Signatories are awarded a logo once their responses to the Code have been updated at least annually and reviewed.

Responsible Investment Certification Program and Symbol, Australia

The Program aims to promote consistent, standardised disclosure and education about green and ethical investment. The Symbol helps consumers to make informed choices on investment products and services.

Applicants to license the Symbol are assessed on strict eligibility criteria focused on disclosure. The Symbol can be licensed by product providers, financial advisers, ngos and other providers of green and ethical investment products and services.

LuxFLAG Microfinance and Renewable Energy Labels, Luxembourg

The LuxFLAG Microfinance Label is awarded to eligible microfinance investment products. Its objective is to reassure investors that the investment actually invests, directly or indirectly, in the microfinance sector (defined as over 50 per cent of the investment product going into microfinance).

LuxFLAG has recently announced that it is introducing a corresponding label for renewable energy investments.