Fund Finance Insights

2021 “tipping point” for Responsible Investing

4 minute read time

2021 is set to be a “tipping point” year for Responsible Investing in the investment industry: this was the consensus at Natwest Trustee and Depositary Services’ ESG-focussed webinar held at the turn of the year.

It is easy to see why: 2021 is set to be punctuated with significant milestones as governments and investors continue to drive towards “greening finance” and “financing green”. All the while, expectations of end investors continue to grow, and there is increased interest in the substance and credibility of claims made for sustainability.

A green recovery and a race to net zero

The concept of “greening” the financial sector was memorably coined in the UK Government’s 2019 Green Finance Strategy, which set bold targets for greenhouse gas reduction and emphasised the role that financial services have to play in pushing the UK economy as a whole to “Net Zero” by 2050. Since the strategy was published, the UK Government has made further commitments with implications for financial services firms. They are expected to play a key role in the COP26 climate change conference in Glasgow later this year.

On 09 November 2020, the Chancellor of the Exchequer delivered a speech highlighting the government’s aim to lead the world on green finance, and to achieve a green recovery from the Covid-19 pandemic. This was echoed in the Prime Minister’s “Ten Point Plan for a Green Industrial Revolution” on 18 November 2020, in which the government outlined its aim to “harness the international reputation of the UK’s world-leading financial sector to encourage private investment into supporting innovation and manage climate financial risk.” These have set the tone for 2021, and the focus is now on meeting these aspirations.

Raising the bar for disclosures

As the government raises expectations for firms, it is also raising standards for accountability and transparency. From a fund regulatory perspective, this translates into two particular policy developments, both of which were trailed in the Chancellor’s speech. These are the introduction of mandatory reporting aligned to the Taskforce for Climate Related Financial Disclosures (TCFD), and the introduction of the UK’s Green Taxonomy.

Many investment firms are already engaged with standards and codes which seek to evidence outcomes and guard against “greenwashing” - these include TCFD as well as the UN Principles for Responsible Investment and the UK’s Stewardship Code – but the government’s intention for TCFD to become mandatory for firms is a significant step up. The government has published a roadmap setting out its proposed timeline.

Of course, some firms will want to report to TCFD standards ahead of their allotted time, in order to demonstrate proactive engagement and meet governmental and public expectations. The competitive landscape on ESG is growing as end investors increasingly seek out credible sustainable investments, meaning that a proactive approach can be a differentiator in an increasingly crowded market.

Early in the year there should be scope for firms to shape the policy itself and to act as thought leaders on the issue, as the government is expected to consult on TCFD alignment for asset managers in the first half of 2021.

Consistent definitions for sustainability

The rise in popularity of ESG has simultaneously led to greater risk of its terminology being misused in boilerplate language or as a marketing exercise. To address this, the UK government is set to introduce a green taxonomy, which will set out accepted terms and definitions, to ensure transparency and consistency in terminology used on prospectuses, reporting and marketing materials. The UK green taxonomy will be based on the EU green taxonomy, but there is scope for divergence. Combined with the Investment Association’s drive for an ESG retail label, the focus this year will be on establishing a shared understanding of norms, terms and principles, increasing accountability and ultimately benefitting the end investor.

Pressure from end investors as well as government

2021 will also likely be a year of increased activism from end investors. Campaigns such as “Make my Money Matter” have increased public awareness of the impact that investments can have in achieving societal outcomes. Growing public interest in investing means that it is likely that there will be further examples of activist interest from end investors not just in the composition of funds but in the exercise of voting rights. As a result, firms will face increased scrutiny on ESG not just from government and regulators, but from the public and from end investors.

In a tipping point year for ESG, firms should be prepared for further focus on transparency, consistency and accountability. Incoming regulatory reform will help firms to avoid the growing reputational risks associated with accusations of “greenwashing,” and this will allow them to become more credible and competitive in an increasingly popular market, by providing benchmarked “decision-useful” reporting data. Expectations from government and end investors have grown, but the means of meeting them have also become much clearer.

NWTDS view

  • We are developing tools to assist clients with ESG data analytics and reporting, and to produce granular and traceable ESG insights as part of our transformation programme. We are actively considering how we can shape depositary oversight standards for ESG funds. Please contact us to find out more.
  • Regulatory developments on ESG are an opportunity for firms: engaging with these developments can help enhance credibility and transparency – differentiators in a crowded market.
  • We have seen clients increasingly engage with standards such as TCFD, UNPRI and the Stewardship Code, in line with the increasing expectations. There is increasing demand for outcome-focussed reporting – in other words, setting out how a policy or investment strategy enhances environmental, social or governance measures.
  • Market metrics appear more advanced in terms of the “E” of ESG. However, there is increasing public and regulatory attention turning to the social and governance categories.
  • The FCA’s five principles for ESG, set out in a speech in November 2020, indicate that there will be closer investigation of the composition of funds, to kick the tyres on the extent to which they truly are “ESG” funds.
  • At a Group level, NatWest is a principal sponsor of the COP26 climate change conference in November 2021.

By Peter Flynn

Associate, Funds Regulation & Governance