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Podcast: Navigating the road to responsible investment

We discuss with Square Mile – an investment consultancy firm, the direction of travel for UK regulation in relation to responsible investing and what the practical application of this looks like for adviser businesses.

Royal London Podcast – Navigating the road to responsible investment

Anna Mercer, Square Mile

Hello and welcome to this Royal London podcast. My name is Anna Mercer, Responsible Investment Analyst at Square Mile Research, and I'm delighted to be joined by Ryan Medlock, Senior Investment Development Manager at Royal London and our special guest, Steve Kenny, who is the Chief Distribution Officer at Square Mile, an award-winning investment research and consultancy firm.

Today, we're going to discuss the direction of travel, the UK regulation in relation to Responsible Investment, and what the practical application of this looks like for adviser businesses. 

Let's start with the partnership, could you please talk us through the campaign and what has been the drivers of this? Ryan, maybe we could start with you.

Ryan Medlock, Royal London

Yes, certainly, thanks Anna. We’re coming off the back of what I would say is an extraordinary year for Responsible Investment. I mean that in terms of both the raised awareness amongst the general public, and also the various market developments we've had in this particular area. I think there's definitely a need and an urgency for advice firms to adopt Responsible Investment considerations within their processes, and that has definitely accelerated over the year.

Obviously, we know that the majority or all advice firms are all at completely different stages in terms of their own Responsible Investment journey. So, we know that some firms have already started, in terms of embedding Responsible Investment in their standard and existing processes, and we know that some firms haven't got around to doing this yet. Indeed, we carried out some adviser research at Royal London a couple of months ago, and we found that 10% of advice firms haven't started embedding Responsible Investment just yet. Then, of course, you've got a whole host of advice firms somewhere in the middle of those two extremes. So from my perspective, I think there's both a strong need and a strong responsibility for the wider industry to support the advice community in this transition, and the campaign material that we've worked on in partnership really strives to do just that.

Whether it's about clearly identifying the different terms which are being used, the definitions underpinning them, highlighting what to look out, or in terms of probing managers and due diligence processes, and also, putting Royal London under the microscope, and I think all of that is ultimately going to benefit advice firms. Partnering with Square Mile was very, very good for Royal London because not only are we benefiting from the expertise that Square Mile has within Responsible Investment, but we're also benefiting from that expertise of the wider advice market. 

Anna Mercer, Square Mile

Brilliant, thank you and Steve? 

Steve Kenny, Square Mile

I think our excitement at being involved with Royal London on this is very much driven by the fact that ultimately, the goal for both businesses is to help the adviser navigate what is a challenging time. I'm on record, and Square Mile, is on record, but I think Responsible Investment is probably as big, if not bigger, than RDR was for the IFA marketplace. The interesting aspect there is that RDR was something that the advice community kicked and screamed against, and probably has been one of the biggest catalysts for where they are today, in terms of a consistent revenue generating business with a far more sustainable business model going forward. There's a degree of irony, in that these two significant changes to how they do their business begin with the letter R, and both are seen to be somewhat of a challenge. However, I think will actually lead to them being far more profitable and regarded in the eyes of the consumer going forward, and it was very much with that premise in mind that we were really keen to be involved in this and provide support to the IFA community. 

Anna Mercer, Square Mile

You've both mentioned the idea of providing support to the IFA community and helping them navigate through this challenging time. I think one of the issues that everyone has raised when we've been discussing this sort of investment is the inconsistency in terminology or language being a real evident barrier. How will this campaign help that? 

Steve Kenny, Square Mile

Unfortunately, there is no quick win solution for that. In true fashion, the industry is not helping itself, and we have a myriad of terms already in use and our regulator and our trade bodies aren't particularly helping us. You have the FCA, who have now decided that ESG is going to be their overarching term for describing this particular area of the marketplace. The EU, and therefore any businesses distributing in continental Europe, will be embracing the term sustainable. The Investment Association, which is the trade body for asset managers in the UK, have decided that responsible is their overarching term for this market, and then you've got her Majesty's Treasury, who recently issued the Greening Finance: The Roadmap for Sustainable Investing, using sustainable as the key umbrella term for investing in this space. Probably the most ironic part of that document, was that they highlighted that the FCA has done some research, which showed that ESG was not understood by the general consumer. So, it seems incredibly ironic that they adopted it as their umbrella term, but coming right back to the nub of the question, the umbrella term is really what it is.

The key thing from our perspective, and what Royal London were very keen to identify, is common terms that could be utilised to describe the broad categorisation of the types of investor in this space. As well as provide some mechanism and understandable jargon for the adviser to use with the client to help them understand the premise of Responsible Investment. So it was very much with that that we sort of set about this project. 

Anna Mercer, Square Mile

Brilliant, and Ryan what would your thoughts be?

Ryan Medlock, Royal London

Well, as Steve said that there, the Responsible Investment terminology is an absolute minefield at the moment. Even within the industry, you've got everyone using the different terms interchangeably, so people will talk or say ethical when really they mean sustainable, you've got people using ESG and impact interchangeably. As part of that research that I referenced a few moments ago, we actually found that 64% of advice firms find the terms confusing. I think part of that is driven by the fact that, as Steve alluded to, we don't have an industry standard just yet. So, the work that we've produced as part of this partnership, I think that can go someway, in terms of helping the advice community adopt a clearer and more consistent set of terms which can ultimately help them have clearer and more consistent client conversations. 

Anna Mercer, Square Mile

Very much so, and over the last month or so, we've seen the UK Government issue its Greening Finance Roadmap and the FCA released a number of discussion papers. What are your thoughts on these Ryan?

Ryan Medlock, Royal London

Well firstly I think it's great that we finally have a little bit of regulatory clarity of some sort, because over the last couple of years we've been looking over at our friends in the European Union, whether it’s SFDR, various amendments to MiFID II that have been alluded to, and we've sort of known that the UK developments are coming down the track, but we just haven't known when or what those developments are going to be. So now we have the proposals on the UK's Sustainability Disclosure Requirements, we have proposals around the new labelling regime, and we have proposals around the new sustainability based rules for advisers. 

Now, obviously there's still a lot more detail required there, and I think at the moment there's probably more questions than answers, particularly when we look at the labeling regime. 

For example, the FCA has proposed 5 labels, and looking at those five labels and reading what's in the paper, it's not immediately clear where strategies such as exclusion strategies fit into those five, and there's obviously a strong emphasis on sustainable investing as a particular approach. So there's a lot more detail, and a lot more clarity which needs to come out, but I think it’s a strong signal of intent from both the regulator and the treasury. We know the regulatory focus on Responsible Investment is only going to intensify over the coming months and years ahead, and again, that just proves that it's essential that we, as an industry, continue to support the advice community.

Anna Mercer, Square Mile

Completely agree and Steve, anything to add

Steve Kenny, Square Mile

Ryan has hit the nail on the head. I think that we, as an industry, and particularly in the UK were at risk of entering the sort of ESG coma for want of a better expression, because we talked about this to such a significant degree, but there was nothing coming out in terms of regulatory clarity. Now there is a path, be it it’s not totally nailed down as to where that path leads us, but I think it’s definitely a direction in terms of where we're going to, an intention, and who it's going to affect.

The key message that I draw from the recent papers we have recent papers we have seen, and the types of language that’s coming out from the FCA and the Treasury, etc., is their route to changing corporate behaviour is about improving information flow, but also encouraging the asset management community to deploy capital in a more responsible nature. By deploying capital in a more responsible nature that will necessitate corporate behaviours to change. Corporate behaviours change, that will influence and help us on the road to sustainability. It will also, by the very root of going to the asset management community as the first point of call, influence future product development, which will then influence what consumers can buy, be it directly or through their advisers.

So I think it's a smart move that the regulator’s framework is targeting the deployment of capital, because that's the more expedient way to change behaviours, rather that regulation. Regulation will follow for corporates, but it takes far longer because of the multi-jurisdictional nature of the way they operate. So going right to the heart of the matter in terms of asset management community is the more expedient way of changing behaviour.

Anna Mercer, Square Mile

OK, so with that in mind, what would you say the next steps are for advisers, in terms of how they apply this to their own businesses.

Steve Kenny, Square Mile

One of the positive things that Royal London have done is put some very practical assistance. When we, as an industry, talk about this, we always talk about it in the ethereal state, and when we talk to advisers from a Square Mile perspective, the most concerning aspect about responsible, advisers fundamentally get the idea of investing for good. The concern they have is their businesses are now very successful and that success is predicated on a centralised investment proposition. The very nature of Responsible Investment can be highly personal, and there is a real concern that it leads to the destruction of what has made their business the success today. 

Now, I think that can be avoided and it can be avoided by having an appropriate questionnaire that actually gives the client information to enable them to make choices, and choices on an informed basis. I think it's going to necessitate training of staff because it's important to understand terminology and again, that was one of the key parts of this project, giving someone a consistent set of language and terms. I think it's little things like how are you as a business living up to the ideals that you're proposing to the clients, it's looking at your material, your website, so that you convey the same types of messaging that you're actually looking in terms of your recommendations for investing.

So, that sounds like a real significant list, but it's manageable. The encouragement that I would give, and we at Square Mile are doing in terms of when we talk to advisers, is it's better to embark upon this journey sooner rather than later. As Ryan said right at the start of this, the change in consumer habits is really tangible, since the pandemic we've been through. The recent COP26 events in Glasgow will do nothing other than further accelerate the consumer's interest in investing in a more responsible way. 

Anna Mercer, Square Mile

And Ryan, what would you say? 

Ryan Medlock, Royal London

From my perspective it's all about taking small, practical steps right now in terms of embedding Responsible Investment in standard and existing processes. I think that will obviously differ depending on a firm by firm basis. For some firms that may be about increasing self-education in this particular area, around particular Responsible Investment approaches or themes. It 

may be having discussions internally, at a firm level, to investigate how the firm is going to approach this. It might be conversations about how you actually start a conversation around Responsible Investment themes with the client, and therefore capturing client preferences at fact-find stage. Then those firms who have made inroads into those sort of considerations, I guess it naturally evolves into how you can go about embedding Responsible Investment considerations within things like due diligence processes and fund research processes, for example, and then leading onto embedding Responsible Investment in PROD target market analysis work, that type of thing. 

So, it will depend on a firm by firm basis, but again, coming back to the campaign material, I like to think that the range of material that we've produced there will be able to support advisers regardless of where they are on that journey.

Anna Mercer, Square Mile

So dependent on a firm journey, but small practical steps. 

Ryan Medlock, Royal London

Absolutely.

Anna Mercer, Square Mile

So the general emphasis here seems to be needing to focus on progress, not perfection, and to embark upon the journey drawing on practical help available in the marketplace, such as the campaign material discussed, which is available on Royal London website: advisor.royallondon.com/responsibleinvestment

Thank you so much to Ryan and Steve for your time today and to you, the listeners, we hope you have found this broadcast interesting and insightful. 

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