Sustainable investing is maturing, and so are the policies, disclosures and debates that surround it, says Andrew Howard, global head of sustainable investment at Schroders.
ESG (environment, social governance) investing has entered the mainstream. According to analysis by Bloomberg, ESG assets soared to an unprecedented US$37.8 trillion by the end of 2021 and are predicted to grow to US$53 trillion by 2025, which would be a third of all global assets under management.
Companies’ licences to operate, the sustainability of their business models and the returns to their investors are increasingly interconnected, writes Howard.
“How companies impact societies and the environment is not just an academic question, it is an increasingly tangible issue. Carbon pricing, plastics, minimum wages, tax avoidance — these are all factors that are translating into corporate financial statements, not just social costs,” says Howard.
Climate change has long been a focal point for sustainable investment and is, undoubtedly, a critical concern. But exponentially increasing pressure on finite environmental resources is exposing cracks across a spectrum of environmental dimensions, bringing a wider range of natural capital issues into focus, writes Howard.
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The UN Biodiversity Conference (COP 15) summit — the biggest biodiversity summit in a decade — is due to reconvene in April 2022 in China after Covid-19 delays. “We will be watching for a Paris-style agreement for nature considering how dramatic the increase in human impacts on the environment has been since the 1970s,” says Howard.
“Last year’s COP 26 climate summit in Glasgow underlined the growing expectations on the private sector to pick up the mantle of action. So, it is now companies rather than governments making commitments around sustainability issues such as carbon emissions, deforestation and methane,” Howard adds.
Increasing scrutiny over regulation is hitting all parts of the value chain, says Howard, asset managers included. “While companies’ sustainability practices and ambitions are becoming subject to greater scrutiny by asset managers, the sustainability practices of asset managers themselves are coming increasingly under the regulatory lens.”
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Sustainable finance regulation keeps evolving at a dizzying pace and 2022 will be no different to last year, he adds. “Everyone in the investment value chain is facing similar levels of regulatory change over sustainability practices. For example, asset owners such as pension funds and insurance companies are targeted by the same or similar transparency and risk management obligations as asset managers.”
Everyone else in the value chain, from asset managers to ESG data and rating providers, is dependent on companies for sustainability data. The most hotly anticipated development in this space is going to be the output of the recently launched International Sustainability Standards Boards by the IFRS Foundation.
In parallel, national regulators are developing their own company reporting frameworks such as TCFD for companies in the UK and in many markets in Asia, or the Taxonomy-related disclosures for companies in the EU.
One key challenge Schroders sees for the market in 2022 is how to deal with regulations not being sequenced in the right order. A specific issue is how the market will treat disclosures of sustainable investment products that have come into effect before the corresponding reporting requirements for companies.
“Moreover, with differences between national regulations already apparent, we are likely to see an increasingly complex regulatory picture of the industry, despite stated ambitions for global alignment,” writes Howard.
Photo: Bloomberg
