Sustainability has developed into a significant part of the investment landscape in recent years. In 2021, investors concerned about climate change and social justice, successfully pushed companies to make changes amid record inflows to funds focused on environmental, social, and corporate governance (ESG).
My predictions for sustainable investing in 2022 are based on this pace of change continuing.
Clearer regulatory frameworks
It is fair to say that the standardisation within the sustainable investment space has been mostly led by industry practice and collaboration. This is now changing for the UK, on the back of various EU directives increasing the disclosure and reporting standards for responsible investment products and providers, as well as introducing more explicit expectations of advisers.
As part of the UK’s green finance strategy published late last year, we expect an increased role of the UK regulators in the responsible investment industry, including the Bank of England, FCA, FRC and The Pensions Regulator. At a global level we anticipate more standardisation in how sustainability is reported against, spearheaded by the International Sustainability Standards Board (ISSB) which was established last year at COP26 in Glasgow.
We expect the next year to bring greater clarity over disclosures, transparency, labels, and expectations of financial advisers in driving the take-up of sustainable investing.
At EQ Investors (EQ), we are already working to provide feedback on some public regulatory proposals. These include the Sustainable Disclosure Requirements (SDR) for corporates and finance, and associated FCA ‘labelling’ scheme for financial products (funds). While the details are not yet formalised, different labels will carry different disclosure requirements, improving transparency for end-clients.
Increased scrutiny on reflecting clients’ sustainable preferences
In my view the labelling scheme for funds and associated mandatory disclosures on minimum requirements – if detailed enough – will help the industry. Greater transparency around a fund’s investment objectives and achieved outcomes will help match an investor’s sustainability preferences with the options available to them in the market.
However, financial advisers are still crucial to help clients understand their options, explore their preferences, and provide advice that matches these as best as possible to a diversified, risk rated model portfolio service or portfolio strategy. The regulator is currently working on how the crucial position advisers hold can be best incentivised and regulated to get all clients access to suitable sustainable products and increase vital sustainable finance flows from private wealth.
To pre-empt any more stringent incoming regulations, I expect most financial advisers to extend their centralised investment proposition, to include several different responsible and sustainable strategies that can match a range of different investor preferences.
Adviser due diligence on discretionary fund manager’s (DFM) will need to be extended to look at expertise in sustainable investing, the support investment managers can give advisers to establish suitability and answer client queries, and sustainability reporting. A successful partnership with the DFM will help financial advisers risk-mitigate in this increasingly regulated space as they gain confidence in the subject.
At EQ we are working to provide our financial adviser community with educational resources to help navigate the sustainable investment space and providing a choice of suitable investment solutions to meet their sustainability preferences.
Climate change commitments under the microscope, and biodiversity loss as the next big challenge
Tackling the climate crisis needs to remain at the forefront of the world’s focus in 2022, and we expect there to be a galvanization of action across private and public sector to make effective progress – before it is too late.
Just as governments will be held accountable to their decarbonisation plans, this will also be the year where action on the widespread climate commitments by asset managers and owners will be demanded. I expect there to be a big focus on finding methods to ensure real-world impact and avoid the risk of decarbonising investments detached from reality. Re-introducing the social impact of the green transition will also be key to make it just for all and provide the needed political popular support.
To do this, we have much to learn from the different net zero strategies that have and will shortly be published across the industry. I hope that all will take this opportunity to collaborate, share best-practice, and use their collective leverage to move us to a net-zero world at the speed required.
The increasing threat of biodiversity collapse is our society’s next, and interrelated, challenge. Only slowly are investors recognising that most investee firms are reliant on the natural world and not managing this relationship sensibly. I anticipate big steps forward in bringing investors together to engage on drivers of biodiversity, through the Finance for Biodiversity Foundation for example.
In addition, we will see the first of beginning of a framework to assess and report biodiversity risks through the Taskforce on Nature-related Finance Disclosures. These will be the building blocks for investors to integrate this alongside climate change.
Force for good
We all know the frightening environmental crisis our planet is facing. To reflect this, we are constantly looking to find new ways to connect clients’ investments with their values. I will continue to engage with those asset managers lagging behind whilst promoting deeper change to ensure our industry is a force for good.