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Until quite recently, responsible investing was a rather niche activity. But surging demand among consumers, rapid regulatory developments and evolving public policy have all helped to catapult environmental, social and governance (ESG) concerns into the mainstream of the investment world – a trend rapidly accelerated by the onset of the global Covid-19 pandemic.
We have long believed that evaluating sustainability is central to the investment process. Now the message is getting through ‘on the ground’ that this is not a non-financial factor; rather, it is simply good investing.
Areas of concern remain
The sheer volume of different approaches and financial products that claim to be ‘responsible’ can be confusing for consumers and financial advisers alike. Greenwashing, or paying lip service to the environmental agenda, is also a concern.
Regulation remains a work in progress, as does public policy, with divergences across regulators, jurisdictions and countries adding to the fog.
We believe that asset managers need to be clear, informative and truthful, and that when they can’t back up their claims with facts, regulators should step in.
Rising demand
Interest in sustainability among consumers and financial advisers has certainly heightened in recent months. When financial website Boring Money polled investors in January, more than 40% of respondents said that the pandemic had made them think more deeply about sustainable investing.
When Boring Money surveyed financial advisers at the same time, a striking 70% agreed that it was part of their role to talk about issues that are not purely financial with their customers. This marked a significant jump from the 20% figure when the survey asked the same question the previous year.
Within this, younger investors are spearheading the interest. Some 35% of investors aged under 55 said that it was fundamental for them to have the option of investing sustainably. That compared with 27% for the over-55s.
These are encouraging figures – but we recognise that while consumers may be gaining an interest in responsible investing, they are also ultimately investing to generate positive financial performance and may still have concerns about the ability of responsible funds to achieve this. While there is growing awareness among financial professionals of the evidence that investing responsibly does not negatively impact financial performance, this perception remains a concern within the retail market. And with more than 7 million ‘do-it-yourself’ investors in the UK, we must ensure we’re clearly conveying to this audience the opportunity to use their capital to create positive change alongside a strong financial return.
Regulation is on the rise, but jurisdictions differ
Regulators are responding to the responsible agenda. The EU’s Sustainable Finance Disclosure Regulation (SFDR) now requires asset managers to show how they integrate ESG issues into the investment process for each product. They must also categorise their product offerings based on the extent to which they are (or aren’t) ESG-focused.
This harmonisation of disclosure is an encouraging first step, and should help tackle greenwashing. However, there are still large variations between jurisdictions – and indeed investment houses – in terms of the standards required to satisfy the new rules. The UK regulator, the Financial Conduct Authority, is set to release rules that are not aligned with SFDR, which risks complicating the process further.
Policy also varies worldwide
The 2015 Paris climate agreement put in place a global framework committing governments to set, and review, emissions reduction targets in line with the goal of stabilising the climate at no more than a 2°C temperature rise. However, but in light of further climate-related news, not least the recent extreme weather events across the world and the sobering Intergovernmental Panel on Climate Change (IPCC) report, it’s clear that a significant gap remains between government ambitions and the scale of action needed to address the climate crisis.
The upcoming COP26 climate change summit in Glasgow in November is proving a catalyst for change, with many governments taking on deeper emissions reduction commitments, and a rapidly growing number of companies pledging to cut their emissions to ‘net zero’. We believe that pressure over ESG issues from institutional investors over the past few years has contributed to the momentum, and we will continue to work to ensure that net zero commitments are backed up with robust implementation plans.
Meanwhile, biodiversity loss is not getting the attention that we feel it deserves. Over the next decade, society will have to work out how to pay for the restoration and protection of ecosystems globally. With initiatives such as the Taskforce on Nature-related Financial Disclosure (TFND) recently getting underway, we expect interest in biodiversity to ramp up. If we get this right, it could represent an exciting opportunity to put our planet on a more sustainable pathway.
Final thoughts
There are many different sustainability issues to consider, and there are many responsible investment strategies in the market aiming to tackle these. Navigating all of this can be a minefield for advisers. For us, matching strategies with client expectations is important. A climate transition fund, focused on providing capital to decarbonise emissions-heavy industries, might not be as green as some would like, for example, even though it is moving capital in the right direction. Advisers need to dig into exactly what ESG issues matter to their clients, and how they wish their preferences to be applied, to be sure that any particular ‘responsible’ product is appropriate.
As regulations and policies start to coalesce, we expect greenwashing to become less of a problem. And as an asset manager, we can play our part by ensuring our messaging around responsible investing remains simple, clear and informative, to ultimately encourage more market participants to consider the sustainability as well as financial performance of their investment decisions.
Risk warnings
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
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