Pressure from institutions is driving change

Agreed by world leaders in 2015, and aiming to be achieved by 2030, there are 17 goals in total and these provide a vital reference point for managers looking to identify and monitor firms' ethical credentials.

As Mr Kenny notes, although increasing investor demand has been a significant reason for the ESG boom, another key growth has been the pressure heaped on governments and other relevant bodies to implement policies which aim to cause less harm to the future of the planet.

There are numerous examples of this, including some on these shores, according to Bryn Jones, manager of the Rathbone ethical bond fund.

He says: “Many supranational issuers like European Investment Bank and [German bank] KFW have sustainability as one of their main principles, and in fact many governments and government bodies have started to issue green government debt.

“In July 2019, the Financial Conduct Authority published a Joint Declaration with the Prudential Regulation Authority, the Pensions Regulator and Financial Reporting Council, welcoming the publication of the government’s Green Finance Strategy, and setting out their shared understanding of the financial risks and opportunities of climate change.

“They will work in a collaborative way to address these risks.”

Paris climate agreement

Mr Jones highlights other developments.

“The Paris Climate agreement is the most-high profile of these.

The Bank of England is carrying ongoing work to assess and respond to climate change risks Bryn Jones, Rathbones

“We have the Department of Work and Pensions concerns around ESG and climate change, and the UN Sustainable Development Goals to name a few.

“The Bank of England is carrying ongoing work to assess and respond to climate change risks, and in May 2018 the Bank published a joint article on the climate challenges for banks and financial regulators.

“This paper presented the key controversies in the central bank and regulator’s response to climate change and discussed potential areas for future research and policy.”

FCA

Prior to its collaboration with other regulators in the summer, the FCA had conducted other work in sustainability, most notably a report that was published this time last year.

The paper, entitled, Climate Change and Green Finance, aimed to open the discussion on climate change and the potential impact of financial services firms and their consumers. In its executive summary, the paper said: “Over the next few decades, climate change is likely to fundamentally transform our economies.

“The FCA must consider all major risks that have an impact on the markets and institutions we regulate, including those posed by climate change.

“The physical risks of climate change, international and domestic political commitments on climate change, and the subsequent response of corporations, capital markets, and investor demand, have started to cause changes in the financial services sector.

The FCA must consider all major risks that have an impact on the markets and institutions we regulate, including those posed by climate change FCA paper

“These changes are likely to accelerate as the UK transitions further along the pathway set out in the Paris Agreement.”

According to Mr Michaelis, the important point now is whether this enthusiasm from regulators, quasi-governments and sustainable initiatives, can be translated into positive change which is delivered fast enough and at sufficient scale.

“We remain optimistic as these things don’t move in straight lines and are typified by huge jolts of movement followed by periods where it feels little progress is being made,” he says.

In addition, he adds that there is also a lot more to the movement than being “green”.

“It’s about business strategy and effectively managing extra-financial risks, some of which are social.

“For example, the gender pay gap disclosure rules. The regulations requiring big employers to publish data on their gender pay gaps came into effect on 6th April 2017, with the first reports being due in April 2018.

“The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 apply to private and voluntary-sector organisations with 250 or more employees,”

Mr Michaelis says: “Central banks are also becoming increasingly vociferous.

“They are worried about the implications of issues such as climate change for the financial ecosystem and are desperately trying to build an understanding of the present and potential impact.

“Speaking at the UN in September, Bank of England Governor Mark Carney called for a step change in reporting and risk management within the financial system in recognition of its potential for amplifying the impacts of climate policies and accelerating the transition to a lower carbon economy.”

In the financial space, asset managers are not the only ones increasing their focus on sustainability.

Pensions trustees

Research by XPS Pensions Group, released in early October, found that 60 per cent of the 400 pensions trustees who attended its recent conference described their overall investment approach as responsible or sustainable.

Furthermore, 73 per cent believed that pension schemes should seek to positively influence climate change.

Mr Kenny explains that tPR has climate change in its crosshairs.

He says: “[tPR] sees this as a key financial risk which trustees must now consider when determining an investment strategy while demanding greater disclosure around stewardship and ESG.

"This carrot and stick approach should encourage businesses to improve their behaviours if they want to continue to enjoy institutional financing.”

craig.rickman@ft.com