What can investors learn from Fairtrade?

The impact investment story may be emotive, compelling and engaging, but retail investors need more than just a good story.

Stephen Barnett, CEO

In an era of clickbait headlines and bite-size news, where everyone is competing for the attention of an information-overloaded audience, what’s more important: telling a good story or providing an evidence-based argument?

That was the question underpinning much of the inaugural FundForumESG and Impact Investing Conference I attended a fortnight ago in Amsterdam.

The impact investment story is a marketer’s dream. It’s emotive. It’s compelling. It makes the opaque world of finance personal and engaging to retail investors, who often don’t have the time to dig through complex risk-and-return profiles, confusing acronyms and dull-as-dishwater fund factsheets.

But retail investors also don’t like to have the wool pulled over their eyes.

In a recent US poll, a remarkable two-thirds of respondents said they didn’t trust their financial advisors and intermediaries to act in their interest.[1] A significant contributor to our unease is the asymmetry of knowledge and incentives among investors, intermediaries and investments.

It’s important to consider this growing sentiment in the context of the burgeoning impact investing industry. Of course, the idea of making money while also advancing progress in clean water, climate action, and gender equality captures the imagination. It provides an opportunity for us to better engage with our ISAs and pensions, taking pride in the choices we make to secure financial returns alongside a better future.

However, there is a concern that the impact investment story is one more example of the way in which we’re being misled by an industry incentivised by commissions and fees.

Since the beginning of 2019, 47 mainstream investment funds have been rebranded to include ‘sustainable’, ‘ethical’, or ‘responsible’ [2] in their names. But how much due diligence has been done to show what exactly makes these funds sustainable?

Retail investors are inevitably and understandably shocked to find their sustainable funds include investments in companies that, from an intuitive perspective, do not align with the story on which they were sold. For every article lauding the growth of sustainable investing, we get another decrying an asset manager for green- or rainbow-washing.

To rectify the problem, retail investors need data and evidence to ensure these funds do what they say on the tin. There’s just one problem: data is boring.

As soon as we reduce a compelling story to numbers and charts, we lose the unique selling point of impact investing and with it the attention of our audience. What’s more, a lot of the data and evidence retail investors see about their fund is misleading (by investing in a renewable energy company, you are not directly decreasing emissions, for instance).

What can we do to reconcile this paradox?

The answer comes from other industries. In complex supply chains, for example, the Fairtrade label is a reliable stamp of ethical production, meaning a story can be relayed to the consumer without needing to dive into due diligence reports and a jumble of numbers.

Think about your reaction to the colour wheel on most packaged food. It’s a signal that a respected organisation has already gone to the trouble of analysing the product and approving its source.

As for consumer goods, impact investors need a simple label to liberate us from data anxiety, allowing the issuer to tell a compelling impact story without allowing their clients to feel they’ve been misled.

A lot of organisations (B-Corp, UNPRI, Morningstar, LuxFLAG, EU Taxonomy) have gone some way to providing us with a label, but often these organisations get stuck in an informational no-man’s land: too complex for easy interpretation by a retail investors, and too lightweight to be a truly ubiquitous and comparable impact label.

There has been a proliferation of ratings, standards and labels across jurisdictions and asset classes. Like the consolidation of independent Fairtrade movements in the 1960s and 70s, we may eventually see these approaches coalesce under a single sustainable label.

Only this would give the industry the authority and ubiquity to overcome investor distrust while continuing to popularise what is, ultimately, a brilliant story.

1 Advisor Hub

2 Europe, Morningstar

3 Rebranding a fund to align to the UN Sustainable Development Goals.