COP26 clearly showed the direction of travel for the funds industry. UK regulators may be behind the curve.
- The most recent Morningstar statistics show that 57% pf Q3 fund flows went into category 8 or 9 funds
- The European disclosure and classification rules are having a tangible effect on investor behaviour.
- The lack of classification and disclosure in the UK is making the industry less competitive
In spite of some initially gloomy predictions, COP 26 has delivered some tangible achievements. Measures on deforestation and methane emissions show that international policymakers are thinking more broadly about the problem of carbon emissions. An international board on sustainability standards should decisively tackle greenwashing.
There was also Mark Carney’s eye-catching initiative on net zero. The former Bank of England chair said he had $130trillion in private sector commitments to fund net zero. This is over 1.5x global GDP or 7x the US economy. It is around 40% of financial system assets. The initiative, named the Glasgow Financial Alliance for Net Zero, or Gfanz, has secured high profile commitments from groups such as BlackRock and Citigroup.
There may be controversies, but it shows a clear direction of travel. In Europe, the fund industry is clearly aligned. The most recent Morningstar statistics show that 57% pf Q3 fund flows went into category 8 or 9 funds (those managed on ESG lines or impact funds). This shows that when people are offered an explicit choice, most will plump for a sustainable strategy of some kind. It also showed that while Article 8 and Article 9 funds still represent only around a quarter of the universe in terms of the number of products but account for a growing share of the market in terms of assets.
This shows the power of well-targeted regulation. The European disclosure and classification rules are having a tangible effect on investor behaviour. With this alignment in place, it seems likely that the new rules emerging from COP26 will also start to shift behaviour on the part of investment managers and those who invest with them. There are, of course, all the usual criticisms about green-washing, but it is clear that it is easier to greenwash without these regulations than it is with them.
Which brings us neatly to the UK. The UK now appears to be lagging in terms of disclosure and classification rules with the result that adoption of ESG and impact funds is slower. In Europe, around half of new funds were launched as category 8 or 9 funds, with asset managers correctly recognising that this is both a selling point and a reputational issue. As it stands, there are no such incentives in the UK, except where fund groups want to market across Europe. Far more making the fund industry more competitive, it is holding it back.