Chancellor Rishi Sunak’s statement on November 9th demonstrates the government’s desire to make the UK a global leader in green finance. The UK is now the first country to make Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures mandatory and has also announced the implementation of a green taxonomy.
This establishes the UK as a leader in green finance and will be encouraging to those who want to see sustainability and climate at the centre of UK economics. The statement is an incredibly important step towards protecting the environment and a positive development for the green finance industry, presenting an opportunity for it to be a critical enabler in the drive towards net zero. Like all change, however, the announcement will also raise several challenges for asset managers.
What does this mean for asset managers?
ESG is here to stay…& the bar just moved higher
- The Chancellor’s statement is a clear signal of intent. Recent years have brought rising client and regulatory demands; now we see the government putting their weight behind the industry, demonstrating that ESG & Responsible Investment are here to stay
- The now mandatory set of disclosures outlined by TCFD has raised the bar for the minimum standard. While complying with TCFD would have previously portrayed an organisation as going ‘above and beyond’ in their commitment to Responsible Investment, by 2022/23, it will simply be a legal requirement
- This shift in the baseline should prompt asset managers to ask themselves where their organisation is now and where they aim to go. Business leaders should take this announcement as an opportunity to pause, reflect and re-articulate their ESG vision: is it to comply, compete or lead? If the aim is to lead, or even compete, careful planning and targeted investment will be required to meet these goals
UK Taxonomy – act early to avoid languishing over linguistics
- Alignment to a set of defined terms will help bring comparability to the industry, and those who have already begun work to align to the EU Taxonomy should see minimal further effort required, given the UK’s intent to align to the EU taxonomy (though divergence may grow following review by the UK Green Technical Advisory Group)
- Additionally, while transparency brings clarity and comparability, it will also increase accountability. Asset managers should expect increased challenges from clients if stated objectives are not met; beginning work to align product level objectives and literature to the incoming taxonomy sooner rather than later will help mitigate this risk
TCFD – change is required to integrate data and report at scale
- In addition to company-level reporting to shareholders and clients, TCFD requires asset managers to “describe how climate-related risks and opportunities are factored into relevant products or investment strategies. Asset managers should also describe how each product or investment strategy might be affected by the transition to a lower-carbon economy.“2 It is also clear that there is work to be done to bring the current standard of reporting to one deemed passable by the TCFD:
- While many asset managers are now able to disclose ESG-related information to a handful of clients, scaling this up across thousands of clients and hundreds of funds, while conforming to new taxonomies, presents a significant challenge. To meet these requirements at scale and implement the required disclosures by 2022/23, asset managers will need to have access to the right data, supported by well-defined data governance and processes
- TCFD will also impact asset managers’ engagement and stewardship activity; it mandates “where appropriate, engagement activity with investee companies to encourage better disclosure and practices related to climate related risks”
- Active engagement will therefore be imperative in ensuring asset managers are effectively assessing the practices and progress of the companies they invest in against the incoming TCFD regulations. Regular, outcome-focussed engagement monitored against a benchmark will no longer be a ‘nice to have’ within the ESG space but a must to ensure compliance
The Chancellor’s announcement is a positive and welcome development in the movement to build a more sustainable future and provide certainty to the industry. However, it will come as a surprise to those who have underestimated the importance of ESG & RI. Managers who have already invested in integrating ESG will have an advantage but are by no means ‘done’. The lesson here is clear – in a world where the bar is being raised progressively higher by clients, regulators and governmental forces, you need to set your own bar to stay ahead of the competition.