Normalising Net Zero – ILP Moneyfacts sustainable investment article
Posted on: December 15th, 2021
I am delighted to share my most recent article on sustainable investment, written for December’s Investment Life and Pensions Moneyfacts magazine – published yesterday.
The piece is primarily intended for UK retail financial services professionals, particularly financial advisers.
The article includes a rapid run through of key recent regulatory developments – and commitments signed – which have led us to where we are today – where sustainability is increasingly taking centre stage – and focusing on the need to achieve ‘net zero’ (greenhouse gas emissions) is rapidly becoming ‘the new normal’.
I am hoping to have also conveyed the view that this is not optional. We have no choice. So putting your head in the sand is not an option.
My thanks once again to ILP Moneyfacts for giving me the opportunity to share my thoughts with their readers – and others.
Download pdf of article here: Normalising Net Zero December 2021.
My draft text, as submitted to Moneyfacts, is below:
Normalising Net Zero
ILP Moneyfacts – drafted November 2021
Experience tells me that most people in financial services are pretty proud of what they do – even if their dream career might have been to be a footballer, astronaut or rock star.
This is particularly the case for financial advisers who spend their time helping people plan for the future.
Yet our own plans have been somewhat light. The financial sector has ignored environmental and social issues for so long that we have been undermining our own futures.
Although COP26 is no panacea it may yet be recognised as a significant turning point. The need to cap global temperature rises at + 1.5 degrees, end or massively reduce, fossil fuel extraction, stop illegal deforestation and transform industries like energy, transport and finance, all proved relatively uncontroversial.
So although it may have been light on memorable headlines perhaps the key take away is that broad, if not always unanimous, agreement is at long last becoming ‘the new normal’.
The run up to COP26
This mood music did not change overnight of course. The build-up started very much earlier, both internationally and in the UK. Although Alok Sharma appears to have been a safe and welcome pair of hands at the helm, Rishi Sunak, the Chancellor of the Exchequer, played an important part too.
In writing to Nikhil Rathi, Chief Executive of the FCA in March, (and other financial regulators) the Treasury, which was previously often seen as slowing progress, took a giant leap forward by notifying financial regulators that ‘transitioning to an environmentally sustainable and resilient net zero economy was part of the country’s economic strategy’.
The Chancellor’s July Mansion House speech (‘A new chapter for financial services’) developed this further and opened the door to new primary legislation, amongst other things saying: ‘We’re launching new requirements for businesses and financial products to disclose sustainability information…’.
The FCAs July ‘Dear Chair’ letter, with its ‘sustainable investment principles’ addendum sought to fix the foundations by saying how they expect the ESG and Sustainable investment fund market to operate, focusing on required improvements to ‘design, delivery and disclosure’.
The FCA’s business plan later that month went further, saying they wanted to improve trust – and to encourage the delivery of high quality climate and sustainability related disclosures, increased stewardship, innovation, a market led transition to a more sustainable future and fund labelling…
Green Finance Roadmap
The government’s Green Finance roadmap, launched in October 2021, pointed to even wider ambition. It referenced the development of a UK green taxonomy, wider adoption of TCFD (climate change disclosures) and proposals to further explore sustainability related disclosures and fund labelling (including references to data and ratings).
And although I’m focusing on the UK here – hugely important international collaboration and leadership also featured highly, notably the work of IOSCO (international securities listings) and GFANZ, a new grouping of investors ‘Glasgow Financial Alliance for Net Zero’.
Financial advisers were also mentioned briefly. Pressing many relevant buttons section 4, p39 of the roadmap says: ‘HM Treasury are exploring how best to introduce sustainability-related requirements for financial advisors. A key aim will be to ensure that they take sustainability matters into account in their investment analysis and understand investors’ sustainability preferences to ensure suitability of advice’.
Sustainability Disclosure Requirements and investment labels
COP26 saw the publication of the FCAs ‘Sustainability Disclosure Requirements (SDR) and investment labels’ discussion paper DP21/4.
Section 1.9 sets out its purpose as informing their work on ‘the development of sustainable investment labels, consumer facing disclosures for investment products, client and consumer-facing entity and product-level disclosures buy asset managers and FCA-regulated asset owners.’
The aims also highlight managing the ‘transition to a sustainable economy’ adding: ‘We want consumers to be able effectively to navigate the market for sustainable financial products and have enough information to assess which products meet their needs and hold firms to account for their sustainability claims’. (The consultation closes on 7 January 2022).
A strategy for positive change
COP26 saw further related announcements, notably a new FCA document ‘A strategy for positive change: our ESG priorities’ which gives ESG national and international context. It indicated outcomes and the actions the regulator expects to put in place, under the overarching aim of ‘support[ing] the financial sector in driving positive change, including the transition to net zero…’
Their views are largely articulated through five core themes:
- Transparency – promoting transparency on climate change and wider sustainability along the value chain
- Trust – building trust and integrity in ESG-labelled instruments, products and the supporting ecosystem
- Tools – working with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts
- Transition – supporting the role of finance in delivering a market-led transition to a more sustainable economy
- Team– developing strategies, organisational structures, resources and tools to support the integration of ESG into FCA activities
Additional key references include: ‘Actors across the spectrum of financial services can be a force for good in this area…. But there is a risk of harm if the financial sector responds to rising consumer demand and awareness of ESG issues without a supportive regulatory foundation and adequate guard-rails.’
The international nature of this work and the government’s intended place were articulated as: ‘We are also working actively with our international partners to develop robust and commonly agreed international standards on ESG that can serve global markets effectively. We want UK consumers, financial services firms and securities issuers to interact and operate within a world-leading system.’
Worlds first net zero financial centre
The ‘world leading’ element naturally became a headline grabber…
I must admit however, my first response to wanting the UK to be ‘the world’s first net zero financial centre’ was not entirely positive. The government had grasped the complexity and international nature of the situation – and the issues around consumer trust… but had they grasped that transforming a financial centre to become net zero will be seriously difficult – and a massive greenwash risk?
I have since softened my view.
Against the backdrop of the local and international changes that are already underway and with the need to ‘go net zero’ uncontested it is clear that financial markets will one day be net zero (if not necessarily absolute zero, or net positive).
So the question becomes – will the UK lead?
I’m sure the hype will continue to worry me, but I do agree that we are well placed to lead if we choose to do so – thanks to the sophistication of our financial markets and our relative success in reducing emissions already (although major oil company listings are unlikely to help).
Indeed measuring and starting to manage climate risks and opportunities, calculating implied temperature rises, stewardship activity and differentiating between transition leaders and solutions providers are already with us – even if they may not be universally understood.
And with the Glasgow Financial Alliance for Net Zero (GFANZ), reporting over $130 trillion of (international) private capital being committed to transforming the economy towards net zero by 2050, we can be reasonably confident there is investor appetite.
And so to my point, which is that this puzzle is starting to come together. Step by step net zero is heading towards becoming a ‘new normal’.
Becoming normal
Some retail financial services professionals (amongst others) may think this sounds like a tall order. Most intermediaries were unaffected by MIFID II (which stalled in the UK) and have probably seen more hype than action. However the reality is that behind the scenes things have started moving pretty swiftly.
Love it or loathe it, investee companies will be reporting their responses to climate change, as will pension schemes, major investors and individual funds. Labelling will hopefully help bring clarity to the advice process and reduce client confusion. And intermediaries will most probably be responding to requirements to ‘ensure’ that they ‘take sustainability matters into account’ and understand clients’ sustainability preferences in order ‘to ensure suitability of advice’ – which completes the link to end investors (who the FCA have been researching and found to be rather interested in all this).
I’m biased of course, but I would suggest you read some of the documents described above – although if or when you search online please search ‘DP21/4’. If you search ‘CP21/4’ – as I did (in error) you will find a consultation on funeral plans.
This is off message of course, but this discovery did feel somewhat apt given the urgency with which we must achieve net zero if we are to build a better, safer future.
Indeed, this year’s extreme weather events tell us why this is not about changing fund names or rearranging deckchairs.
And for this to work – and to win trust – my view is that we need to ensure net zero and related key sustainability problems, like nature loss, must not be tucked away in new additional literature, or new products (although both may be useful).
Net zero must instead be recognised as integral to everything we do – because it is. This means I believe it should be built into all existing processes, products and communications. Everything from existing, legally required documentation, to templates and new marketing materials now have a part to play.
And I am confident this can happen, in part because this has already begun. Growing ‘ESG fatigue’ is indicative of this. ESG is no longer the shiny new toy.
And as our journey continues, we learn more, and rules and standards evolve, net zero will increasingly become just another thing we manage. Part of a service industry that prides itself on helping people to plan – and provide for the future. And as that emerges, net zero will no longer be a novelty. It will be just part of what we all do. Just normal.
So, as we head towards the New Year and with my best wishes, I’d encourage you to start working through how you will build net zero into your plans – although in the interest of festive cheer maybe try not to mix your DPs and CPs!
ENDS
Julia Dreblow
Founder, SRI Services and Fund EcoMarket
Julia was appointed to the newly formed ‘Disclosure & Labels Advisory Group’ in November. The group will report into the FCA and Treasury in Spring 2022.
Links
Greening Finance: A Roadmap to Sustainable Investing – GOV.UK (www.gov.uk)
https://www.fca.org.uk/news/news-stories/guiding-principles-esg-sustainable-investment-funds
https://www.fca.org.uk/publications/corporate-documents/strategy-positive-change-our-esg-priorities
https://fundecomarket.co.uk/help/appointment-to-fca-disclosure-and-labels-advisory-group