Portfolio Adviser • Portfolio Adviser Magazine December 2023 • Last word

Chairman of the insignificantly-sized investment company Kermitted Asset Management reflects on the FCA’s latest attempt to impose order on what we are currently calling sustainability

“Is it OK if we skip talking about COP28 this week and leave it till next time?” I asked the chairman of the insignificantly-sized investment company Kermitted Asset Management when we caught up the other day. “It’s a controversial move,” he said, shaking his head. “As a rule, we members of His Majesty’s financial services industry are much keener discussing what might hypothetically happen ahead of COP.

“Equally, we don’t mind chatting though what could theoretically happen during COP. But this idea of talking about what we are going to do – in real life and everything – in the light of what actually happened at COP?” “I know, I know,” I said, holding up my hands. “It’s a bit like expecting fund managers to revisit their New Year outlooks 12 months later, which always seemed perfectly reasonable to me – and apparently no one else.”

“Still, no COP till our next meeting, OK?” “It’ll never catch on – but fine,” grumped the chairman. “And what’s so important you’d rather be talking about it instead?” “The recent tweaks to the FCA’s Sustainability Disclosure Requirements, of course,” I replied. “The good old SDR?” nodded the chairman. “That’s actually fair enough.” “So what did you think?” I prompted.

“A few interesting developments,” the chairman nodded again – clearly playing for time as he scrolled through his phone for the relevant briefing note. “One thing I would say – I’m not sure there was a whole lot of point scrapping the requirement firms outline a casual link between stewardship activities and demonstrable improvements within held assets – it wasn’t as if that was a hugely onerous demand.

“In fact, if I’m honest – and you won’t often hear me say this in the context of financial red tape – I did think the regulator could actually have come down a bit harder.” “Causal link,” I sighed. “Hmmm?” hmmmed the chairman. “The FCA wanted sustainable funds to be able to show a causal link between the engagement work they undertake and any results they claim to achieve,” I said.

“Yes, that would make more sense,” agreed the chairman. “Still, no harm done, eh? I mean, if they’re scrapping the rule and everything? And, if it was a causal link they wanted, that’s optimistic, isn’t it? Push comes to shove, we can nag away at naughty businesses with the best of them but, looking back, I’d struggle to pick out a single company where we could honestly say, ‘Yup, it was us who made them see the error of their ways’.”

“That aside?” I prompted again. “That aside ... that aside,” he repeated – before clearly finding what he was after. “That’s right – well, obviously, we are very supportive of the introduction of the fourth ‘sustainability mixed goals’ label because ... oh no ...” “Why obviously?” I asked, with a smile, twigging the chairman’s phone had run out of puff – no doubt because of Adair’s new-found penchant for a TikTok binge.

“Well, obviously, because ... the more goals the regulator allows ... the more chances we have of hitting one?” he finished weakly. “Like it ups the odds?” “Indeed,” I said, letting him have it. “Aside from that,” the chairman continued, “we have been quite impressed with the regulator clearly taking its time to try and get this right – even if we still have certain reservations about the nomenclature.

“Before you ask – you’ll remember, I am sure, our concern a few months back about the label of ‘sustainable improver’ sounding like the very last prize that gets dished out at a school sports day. Beyond that, though, I am still not wholly comfortable with the whole idea of ‘sustainability’ as any sort of meaningful benchmark for investors.

“After all, I would respectfully suggest if, as an asset manager, you are not as a matter of course buying businesses that have a better than 50/50 chance of surviving into the next year, then you really should be taking a long hard look at your investment process. Still, it looks like that ship has sailed and ‘sustainability’ is the new ‘ESG’. As a keen student of irony, given all the names the old-money ‘ethical’ sector has been through, it will be interesting to see how long this one lasts.”