- The investment landscape has been changing, driven by increasing pressure from governments and regulators to address climate change and a new focus on sustainability, recognising the direct impact companies can have on systems and economies to sustain significant and prolonged positive transition.
- Investment firms across the globe are now grappling with this challenge. To deliver genuine integration of ESG into research and investment processes requires a significant commitment and investment in data and systems infrastructure.
- Asset managers will be required to integrate sustainability factors into their investment decision making, and show evidence of this through clear and consistent disclosures and client reporting.
- Against the global macro environment and industry change, we expect clients’ expectations to evolve over time to demand greater ESG integration and to focus more on ESG best-in-class and outcome-focused strategies. This will take time, but it is the inevitable result of the regulatory objectives, net-zero targets and other commitments being set by corporates and evolving retail customer demands.
2020 saw unprecedented change around the globe – economically, socially and politically. The most significant impacts resulted
from the global coronavirus pandemic which has potentially changed many aspects of life for ever. The investment landscape has
been changing too, driven by increasing pressure from governments and regulators to address climate change and a new focus
on sustainability, recognising the direct impact that companies can have on systems and economies to sustain significant and
prolonged positive transition. The pandemic has only accelerated the focus on climate change and continues to shine a light on
responsible investment (RI) more broadly.
The far-reaching regulatory reforms in the EU and beyond have seen
fundamental shifts by companies setting 2050 net-zero emissions targets,
which in turn have driven an increased focus on all ESG (environmental,
social and governance) areas, pushing everyone to raise standards and
increase transparency and accountability. This in turn has changed the
investment landscape through significant changes in client expectations
and demand, and will result in fundamental shifts for investors and asset
managers across the globe.
To understand what this means for the investment industry and to the
clients we serve it helps to unpick some of the central themes.
Integration
ESG considerations are not new – such themes have been key inputs
(albeit to different extents) to fundamental investment approaches for
many years. However, the EU regulation’s intention is for ESG to be
considered by all investors. So the fundamental shift now taking place is
how investors can demonstrate that sustainability risk, as represented by
ESG considerations, has been integrated into their investment decision
making. Investment firms across the globe are now grappling with this
challenge. To deliver genuine integration of ESG into research and
investment processes requires a significant commitment and investment
in data and systems infrastructure. However, clients’ expectations
are evolving rapidly, and increasingly asset managers are required to
demonstrate that they have genuinely embedded ESG not just in their
investment research, but across all aspects of their company and culture.
Transparency
In the past decade the investment industry has increasingly been
pushed by EU regulators and policymakers to increase transparency to
customers, through initiatives within MiFID, the Treating Customers Fairly
principle and the recent Asset Management Market Study. Meanwhile, the
incoming European Sustainable Finance Disclosure Regulations (SFDR)
represent a different aspect of the transparency agenda. Asset managers
will be required to integrate sustainability factors into their investment
decision making, and show evidence of this through clear and consistent
disclosures and client reporting. Historically, funds were being marketed
with a confusing lexicon of RI, sustainability and ESG terminology. One of
the key objectives of regulators has been to ensure a clear and consistent
set of minimum standards which funds are required to meet in order to be
marketed as genuine ESG or sustainable outcomes funds.
Choice
Historically, clients invested in pooled funds have been able to choose
between “standard” strategies or dedicated ESG or sustainable funds,
while those with segregated mandates have had the flexibility to create
customised ESG and exclusion preferences. However, the new investment
landscape will see ESG considerations being integrated across the full
spectrum of investment strategies offered by asset managers. The level
of consideration at security and portfolio level will vary depending on what
the strategy is aiming to achieve and whether it aims to be a focused ESG
or sustainable outcome fund, meeting the requirements of SFDR articles
8 and 9. Against the global macro environment and change set out earlier,
we expect clients’ expectations to evolve over time to demand more ESG
integration and to focus more on ESG best-in-class and outcome-focused
strategies. This will take time, but it is the inevitable result of the regulatory
objectives, net-zero targets and other commitments being set by all
corporates and evolving retail customer demands. Therefore we believe it
is essential that asset managers can support clients at all points in this
journey. In turn, this will increase choice for clients, bring about greater
suitability and achieve better outcomes.
In 2021, we are entering a new era of investment – one where ESG elements are considered integral to all risk and opportunity factors. An era where RI consideration and integration is the baseline.
Conclusion – looking to the future
In 2021, we are entering a new era of investment – one where ESG
elements are considered integral to all risk and opportunity factors. An
era where RI consideration and integration is the baseline. We see this
driving improved choice and product innovation. As an industry we will take
greater ownership for promoting the benefits of good governance, social
responsibility and environmental awareness for long-term sustainability
and better outcomes for our clients. As fiduciaries and responsible
allocators and stewards of our clients’ capital, we have a responsibility to
not only them, but our employees, future generations and the economies
we support. Never has there been a more pivotal moment for the industry
to respond.
