ESG Investing  

How are regulators ensuring ESG investing is considered?

This article is part of
Guide to ESG and regulation

How are regulators ensuring ESG investing is considered?
(Angela Benito/Unsplash)

In the past few years there has been an onslaught of regulatory changes regarding environmental, social, and governance considerations, signalling a sea change in the way advisers will do business with clients.

The UK government and others around the world have made strong environmental commitments at summits such as Cop26 in Glasgow. Those commitments drive government policy, which drives government legislation, which in turn drives regulation. 

So, there is a combination of global, EU and UK regulations and initiatives that are quickly changing the landscape in all sorts of areas, but in particular in financial services. 

The reason for this is that the financial sector has been recognised as having an especially strong influence in delivering global and domestic climate and environmental objectives. 

There are initiatives from the UN such as:

  • the UN principles for responsible investment (principles for incorporating ESG issues into investment practices);
  • the UN global compact (a principles-based approach to business practice aligned to human rights, labour, environmental and anti-corruption standards); and
  • the UN sustainable development goals (a framework of 17 sustainable development goals designed to balance outcomes of social, economic and environmental sustainability).

There are other global initiatives such as the taskforce for climate-related financial disclosures (TCFD), a global framework set out by the Financial Stability Board to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. 

As well as the net zero asset managers initiative, a global initiative with 236 signatories with $57.5tn (£47.6tn) in AUM, setting ambitious commitments to achieve net-zero emissions.

 

 

 

 

 

Last December the Financial Conduct Authority published its rules aimed at asset managers, life insurers and FCA-regulated pension providers to make climate-related disclosures consistent with the recommendations of the TCFD.

Additionally, the sustainable finance disclosure regulation, which was introduced by the European Commission in 2019 and came into effect in 2021, imposes mandatory ESG disclosure obligations for asset managers, requiring them to report on both the impact of sustainability risks on the investments, as well as the principal adverse impacts of their investments on sustainability factors.

Both the SFDR and TCFD require investment managers to make both entity-level and product-level disclosures. 

However, one of the key differences is that the SFDR is broader than the TCFD, given that it covers all ESG risks as opposed to just climate change. 

Ryan Medlock, senior investment development and technical manager at Royal London, says: “There has been an explosion in various ESG-related regulatory proposals over recent years and it’s pretty clear that regulators and policymakers are using ESG to re-inject a long-term focus back into investment activity. 

“This has predominantly been from an EU perspective with the EU sustainable finance action plan central to these aims. In the UK, we’ve been looking at these developments as a direction of travel that the UK is likely to adopt and that is starting to turn to fruition as clarity emerges.”

Terminologies

In the UK, one of the key concerns of the FCA is the huge collection of terminologies that relate to this area: ethical, socially responsible, impact investing, sustainable and so on. 

The challenge is not just the number of different terms, it is the lack of a commonly accepted framework for discussion – many of these terms overlap or are understood differently by different people. This creates a confusing market.