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Experts warn against knee-jerk decisions over ESG

Experts warn against knee-jerk decisions over ESG

Investors taking environmental, social and governance issues seriously should beware of making wholesale changes as short-term reactions to the green agenda, a legal expert has warned.

Paul Edmonson, financial services partner with law firm CMS, said while the rise of ESG investment and decision-making was welcome, he cautioned against large investors, such as insurers and pension funds, making wholesale changes that could not only affect market movements but also lead to overpricing of investments.

He said: "While 2020 is likely to see an increasingly effective integration of sustainability in portfolio construction. Insurers are required to invest prudently and so a mass-transition out of current investments in order to chase the same, potentially over-priced, ESG-friendly asset classes would itself present an undue investment risk.”

His comments came after the UK government and regulators implemented a series of changes and amendments to ensure the transition to a carbon-neutral economy becomes part and parcel of financial decision-making, in accordance with the COP-26 agenda. 

Mr Edmonson added: "Last year saw the rise of ESG in insurance investment at the micro level of individual investment decision making.

“While awareness of the impact of climate change has gained momentum, the insurance sector generally is yet to start taking the fundamental steps of change that we have seen in the asset management industry.

Kris Atkinson, lead portfolio manager on the newly-launched FF Sustainable Reduced Carbon Bond Fund for Fidelity International, also said investing along ESG principles needed to be a thoughtful process, rather than a standard 'screen or green' approach.

He said: “Some investors believe green investing is black and white, only considering companies with low or zero emissions. It isn’t. To tackle the threat of climate change as investors we need to embrace companies transitioning to greener business models, not exclude them.

"By actively engaging with companies we can reduce emissions, influence their decarbonisation strategies and move to a more sustainable future.”

According to Gill Lofts, sustainable finance leader at EY, although February's Bank of England announcement that every financial decision will take climate change into account was "a bold one", there was much more that needed to be done.

She explained: "The detail around what firms – both public and private - need to do to build on their current sustainability metrics or how they will report and measure is not yet clear. Banks, asset managers and insurers need to work closely with government and policy makers on this crucially important and complex matter.

"They will be keenly awaiting more information before they can act with real meaning and embed climate change into every financial decision they are making."

simoney.kyriakou@ft.com