How can investment managers help solve the sustainability puzzle?
‘Together, and only together, can we build on the UK’s proud track record and continue to lead the world in sustainability and responsible investing,’ said John Glen MP, Economic Secretary to the Treasury, speaking at the Investment Association’s annual Sustainability and Responsible Investment Conference in September.
He’s right, of course. John Glen’s call to action to the investment management industry sought to galvanize investment managers to play their part in ensuring that the UK remains a global leader in sustainable finance, but it also speaks to something even greater than this. His statement recognizes the reality that no one single group has the complete set of tools to bring about change on a global scale on its own. That applies whether you’re an investment manager, asset owner, corporate, the UK Government or the regulator – but we can each play our part.
Driving change in sustainable finance is multi-layered, multi-actor and it involves multiple choices. It works best when each new initiative has a clear objective; when each actor contributes in a way that fits their particular role, strengths and responsibilities; and when we clearly communicate which specific piece of the sustainability puzzle we’re working on.
The last two years have seen significant regulatory change and policy action in sustainable finance. Most evidently from the European Commission, but equally important signals have come from the UK and other jurisdictions. The Commission’s Sustainable Finance Action Plan has been a driving force in ensuring that sustainable finance has remained on everyone’s lips for the last two years, without pause. Their geopolitical mass together with their level of ambition has galvanized action at an unprecedented pace.
The UK’s great strength has been to drive responsible and sustainable behaviours, continuously, robustly and for many years, through its longstanding use of ambitious industry codes and its world-leading industry expertise. These successes have been supported by the careful consideration of how such an approach bolsters existing best practice and impacts different stakeholders. As the first major global economy to legislate its commitment to achieving net zero, these strong foundations will be essential to meeting the target by 2050.
The clarity with which the FCA and government have outlined their objectives has been key to marking out the future direction of travel. The FCA's Feedback Statement on Climate Change and Green Finance sets out four objectives that are focused on issuer disclosures; stewardship and integration of ESG considerations by investment managers; protecting consumers; and collaboration. The UK government set out its plan in its Green Finance Strategy of July 2019 with aims to both ‘green finance’ and ‘finance green’, as well as capitalising on the opportunity this presents for the UK.
These different regulatory and policy initiatives are united in their commitment to drive sustainable finance, but differ in the detail by focussing on different aspects, drawing on different levers corresponding to their respective cultural norms and strengths, and each is an important piece of the overall sustainability puzzle.
Turning to investment managers specifically, there is a common misconception that divestment is our only lever. It’s been the rallying cry of protest groups like Extinction Rebellion, which have proclaimed ‘Don’t be a Dinosaur; Divest from Fossil Fuels’. Whilst divestment is a tool; it is not our only one. Far sooner than the point of divesting, investment managers play an important role engaging with investee companies to help and support them in their plans to transition to a more sustainable footing.
This is a crucial way that investment managers can act without shutting down entire sectors overnight. The impact of the pandemic has given us a taste of what a sudden shock to a sector looks like, and the devastation caused by resultant job losses. Our actions must instead bring about a managed transition to net zero greenhouse gas emissions by 2050 that seeks not to leave anyone behind and is conscious of its impact on businesses, society and individuals. Divestment is a last resort, not a first response.
Indeed, investment managers can contribute to sustainable finance in many different ways, for example, through engagement but also by pursuing investments in certain sustainability themes or generating a positive impact – as demonstrated by the IA’s Responsible Investment Framework.
It is important that we do not restrict the different ways in which investment managers contribute. Instead, we need to expand our understanding of different investment approaches and explain them more clearly; ultimately to empower savers and investors to make choices that align with what they want and care about – whether that be long-term sustainable returns to retire comfortably or contributing towards particular sustainability outcomes with their money. Neither is right or wrong; this is about investment managers empowering investors to make informed choices.
Our ability to remain open to the different contributions that different actors can provide, whether they be investment managers, regulators, or policymakers, is extremely important when looking at policy making in this space. Decisions to restrict the breadth of sustainable finance solutions would have a real-world impact on consumer choice, the management of material risks by financial services institutions and, ultimately, global financial stability. In order to give ourselves the best chance of reaching net zero by 2050, we need to capitalise on our individual strengths and act together.