2020 has seen public awareness of Environmental, Social & Governance (ESG) issues soaring and regulators, policy makers and industry bodies raising the minimum standard for compliance. With Europe at the helm, in 2021 we expect the winds of regulatory change to carry across the globe, with increasing alignment across jurisdictions, and investment managers trying to keep up to avoid loss of client revenue, and reputational impacts of non-compliance.
There are consistent themes across the incoming standards. Climate remains king as an area of focus, with 230 TCFD signatories globally already reporting on carbon footprint and climate scenario analysis. Focus is shifting from firm to fund level, with EU Sustainable Finance Disclosure Regulation (SFDR) the most notable example, compounding the complexity of reporting. Requirements are also becoming increasingly effective at measuring meaningful impact, encompassing not just specialist ESG products but entire fund ranges. A consistent framework across the investment value chain will be key to compliance.
The U.S. has remained a regulatory laggard, but even under the Trump administration the Department of Labour softened its position on the inclusion of environmental risks following intense industry lobbying. The change in administration will likely expedite the inevitable. In APAC, Japan’s existing Stewardship Code clearly mirrors the previous incarnation of the UK code and is likely to follow suit on later phases.
The advent of the COVID pandemic seems, if anything, to have propelled ESG considerations higher up the investor agenda and underscored the importance of operating in a globally consistent approach for investment managers. Companies who aspire to only meet the minimum applicable standards in each jurisdiction will face a compliance headache through the proliferation of mandatory and voluntary ESG requirements.
The pace of change is dizzying. For firms to keep up we firmly believe that mastering the fundamentals remains crucial. First, understanding and anticipating what clients and the local regulators demand, today and in the future. Second, defining a clear vision and strategy for areas of leadership versus compliance. Lastly, creating a clear and coordinated plan across the organization to execute that does not underestimate the operational impact across the value chain, including a robust data strategy. Those who do not build strong foundations in the ESG space now risk being swept aside.