HUB EXCLUSIVES PANEL DISCUSSION 2022 – THE EVOLVING ESG LANDSCAPE
Panel discussion, hosted by Cherry Reynard, with:
Sandra Carlisle – Head of Sustainability, Jupiter Asset Management
Matthew Jennings – Investment Director, Sustainable Investing Team, Fidelity International
Rosie Rankin – Director, Positive Change Specialist, Baillie Gifford
This has been an important period for sustainability regulation. Europe has led the way, implementing the Sustainable Finance Disclosure Regulation in May 2021, following the EU taxonomy in June 2020. There is now a draft social taxonomy circulating in Europe. There are signs that this is already having an impact on fund flows in Europe. To what extent are the UK rules likely to follow suit?
There has been progress in the UK. The Environment Act became law in November 2021, creating the UK's new framework for environmental protection. The Taskforce for Nature-related Financial Disclosures (TNFD) now has its first draft framework for companies to report on their impact on nature. The FCA is working on a series of proposals to bring the UK in line with elsewhere.
Will the UK’s legislation evolve along the same lines as that of the EU? Matthew Jennings, investment director at Fidelity International, says: “The current version of the FCA’s regulation is fairly likely to evolve. We don’t know what the end regulation will be, so how similar it will be to the EU legislation remains an open question. However, the UK’s market structure is quite different to that of Europe. European distribution is dominated by the large banks and insurance companies that will have their own ESG commitments and guidelines. So there’s been quite a noticeable impact on flows in Europe, but in the UK where we have quite a fragmented market, it’s not clear that the mechanisms will operate in the same way.”
That said, he believes there are some similarities: “There is greater interest in investing in a way that is aligned to the type of future you want to pass on. The general background is supportive of growing ESG funds over time even if it doesn’t play out in exactly the same way.”
Sandra Carlisle, head of sustainability at Jupiter, hopes that the UK regulators will have learnt from some of the teething problems of the EU rules. She adds: “The EU taxonomy has made a difference, but perhaps not the way we thought it would or wished it would. We’re still having a debate about mitigation or adaptation and whether nuclear is or isn’t a sustainable activity. These things are a lot more complex than we thought at the outset.
“In our view, it started in the wrong place. As fund managers, we are having to disclose against a taxonomy that isn’t fully fleshed out and against corporate reporting that doesn’t exist yet. I’d like to think the FCA is being thoughtful about how to avoid some of these challenges.”
She says that while the category 8 and category 9 funds have attracted strong inflows, this is not necessarily the right model for the UK funds industry. She says: “Clarity for the end investor and helping people understand what they’re buying is really important. However, I’m not convinced that putting a number on that is very useful. The UK has a ‘comply or explain’ approach. Giving clarity to investors has to be the priority and I’m not sure the EU taxonomy is doing that.”
There has been a huge number of providers emerging, giving ratings for companies and individual funds. However, there is a lack of standardisation and the data isn’t necessarily helpful in making the right decisions. Rosie Rankin, a director on the Positive Change Strategy at Baillie Gifford, says: “Carbon footprints, for example, gives you some top-level data, but they doesn’t provide insight into the intent of the fund managers and what it might be doing to the carbon crisis. You really need to dig down to understand where the biggest contributors are.
“For example, our second largest carbon contributor is Orsted, the renewable energy company. We need to understand what is contributing to these top line data figures. ESG scores are good at focusing on ESG downside risk and they are based on backward looking data. They’re not focusing on the ESG opportunity – the ability of individual companies to help the world’s problems. We’re not going to make a difference if we simply avoid risk. We need to embrace opportunity as well.”
As such, even when the right regulatory measures are put in place, there will still be a role for experienced fund managers in finding the right opportunities. Data reporting is only half of the story in achieving sustainability goals.