Fostering responsible investment through regulation
As a society we have witnessed a huge surge in demand for action on social and environmental issues over the last few decades. Such action is critical to meeting the Paris Agreement on climate change and the UN Sustainable Development Goals. Attitudes have shifted and a real momentum has built in people’s desire to ‘play their part’ and ‘do their bit’. This is a straightforward task when focusing efforts towards recycling or Fairtrade purchases. When it comes to investing, however, the industry has faced criticism over the barriers that exist preventing investors from adopting such change. The average non-professional investor would more than likely be able to confirm the provider of their stocks and shares ISA. Perhaps they could recite the names of the funds their pension is invested in. But holding a true understanding of the types of underlying companies their capital is funding is an altogether much more difficult task. Whilst areas such as recycling and Fairtrade consumption have witnessed enormous progress in recent years, the investment industry has lagged behind.
Authorities understand the potential that lies here. Investor demand is a key driver of change. The problem is individual investors haven’t been equipped with the necessary information to make informed decisions on whether or not their invested funds are being used as a force for good. A wave of new regulation is being introduced to try to resolve this problem.
The European Union led the way, announcing its Sustainable Finance Action Plan in 2018.[1] The plan outlined a number of key regulations and standards including a common taxonomy, data proposals, and a new EU Green Bond Standard. This is the latest measure the Union has unveiled to deliver on its international commitment to reach net-zero carbon emissions by 2050.
Elsewhere, leaders have taken note. Countries including China, Canada and Singapore have joined the International Platform on Sustainable Finance announced in October 2019, designed to synchronise standards across the international stage.[2] A newly assembled climate team is predicted to drive the US to the front this race as the new Biden administration looks to stamp its mark on the sustainable finance movement.[3]
Closer to home, UK chancellor Rishi Sunak has announced the UK will be the first to create disclosures that are aligned with the Task Force on Climate related Financial Disclosures (TCFD) mandatory by 2025.[4] The UK is keen to promote ‘equivalence’ in relation to EU regulation. By adopting a very similar regulatory framework to our neighbours, we ought to limit trade barriers and enable EU companies to continue to do business with us without having to modifying their operations in any way. One area so far missing from the UK’s equivalence regime is the adoption of the EU’s Sustainable Finance Disclosure Requirements (SFDR). The requirements are designed to help investors - specifically non-professional investors - distinguish between investment products with authentic Environmental, Social and Governance (ESG) and sustainability factors and those that are ‘greenwashed’. Greenwashing describes a process when firms or fund managers label their operations or products as ethical without the necessary credentials to back this claim up.
The UK has so far not adopted the SFDR although a consultation paper is due at some point in Q1 of 2021.[4] The disclosure requirements are the precise kind of help non-professional investors are in need of to equip them with the necessary information to make more informed decisions. Investment organisations would need to disclose the level and extent of ESG embedded within their operations - if indeed any at all. At Castlefield we acknowledge the important role such an initiative can have on fostering responsible investment. So while the EU disclosure requirements don’t apply to us directly, we have introduced a Sustainability Risk Policy. The policy can be found on our website here and gives a transparent illustration of how ESG factors are integrated into our investment process. This gives investors a clear understanding of the kinds of organisations their capital may be funding and, ultimately, provides them with the power to make more informed decisions with their investments.
Written by Michael Owens
[1]https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en
[2]https://www.moodysanalytics.com/regulatory-news/jun-11-20-ec-announces-additions-to-membership-of-sustainable-finance-platform
[3]https://home.kpmg/xx/en/home/insights/2021/02/sustainable-finance-a-regulatory-imperative.html
[4]https://esgclarity.com/sfdr-technical-standards-report-the-ec-needs-to-shed-further-light/?NLID=ESGC-NEWS-UK---Jan-Mag&NL_issueDate=2021028&utm_source=ESGC-NEWS-UK---Jan-Mag-2021028&utm_medium=email&utm_campaign=investmentnews&utm_visit=&msdynttrid=8IXrD7NZC3DQ6ryoYgoGq0tK2RHzncIqpgnDFASfJvM