In Focus: Megatrends  

'ESG separation is beginning to unfold'

For example, container shipping companies follow a different value chain than that used by the automobile industry. Both industries leverage diesel, ethanol and methanol but in vastly different ways.

FTA: What could a universal ratings system look like and how would it work for advisers?

SN: Advisers need to have their own metrics for how companies fit into their guidelines.

A ratings system could have its benefits but the challenge is finding the starting point and ensuring that the system is tailored to the value chain and workflows of a specific industry.

For example, when looking at something like the retail sector, it is important to factor in all major production materials such as polymers and plastics and, most importantly, how and where they fall in the entire carbon value chain.

Advisers must also do their own due diligence in researching how compliant companies are throughout the production and distribution processes and in managing social issues around child labour and manufacturing practices across countries involved in manufacturing of the retail product.

FTA: What do you think the UK government has in store for ESG asset classification?

SN: The UK is trying to steer its independent path from the rest of the EU that follows the Sustainable Finance Disclosure Regulation applied since early 2021.

The UK’s Sustainability Disclosure Requirements are intended to create an integrated and streamlined framework that brings together sustainability-related reporting requirements for corporates and financial institutions, unlike SFDR which is heavily focused on asset managers.

The SDRs are likely to change the nature of reporting requirements, given the introduction of double materiality in reporting.

For companies this would require disclosures on how sustainability issues impact their business and how the companies’ activities impact sustainable development in the society and environment beyond their immediate operations.

FTA: A recent report from the Bank for International Settlements has warned investing in a portfolio aligned with ESG values is near impossible and investors should focus on aligning their portfolios with either E, S or G principles instead. Would you agree?

SN: The BIS recently issued a warning that there could be a bubble in ESG and asset value.