David Prosser looks at the year ahead for ESG in terms of regulation, new investment company launches and ESG disclosures.
Will 2022 be the year in which we get to grips with what “environmental, social and governance” actually means? The trend towards ESG-focused investment has accelerated to breakneck speed during 2021 – to the extent that analysts such as PwC predict every collective fund will have an ESG lens within a couple of years – but there is still widespread disagreement about what really constitutes an ESG approach.
Even seemingly simple questions are fraught with difficulty. Do you want a fund that avoids companies involved in activities you don’t feel comfortable with – or would you rather your money was invested in such a way as to give you a voice to advocate for change at such businesses? And how, in any case, do we define these activities? Should ESG funds steer clear of all companies that aren’t carbon neutral, say, or just the heaviest polluters?
In the year ahead, we will move closer to answering some of these questions. For one thing, we’ll see the next phase of the implementation of the European Union’s Sustainable Finance Disclosure Regulations (SFDR), which helps managers define what types of fund they offer from an ESG perspective. And another promising development is the launch by the International Financial Reporting Standards Foundation (IFRS) of a new standards setting board, the International Sustainability Standards Board (ISSB). The ISSB is to develop a comprehensive global baseline of sustainability-related disclosure standards to provide capital market participants with information about companies’ sustainability-related risks and opportunities.
These discussions are playing out in the investment companies sector too. It has sometimes been criticised as being behind the curve on ESG investment – in that there are relatively few funds with a very specific mandate to invest with an ESG objective. But that criticism looks increasingly unfair – partly because we continue to see launches in this area, but also in the context of the nuance around what constitutes ESG investment.
On new launches, we have, in recent times, seen funds emerge such as Civitas Social Housing, Home REIT, Schroder BSC Social Impact and Schroder British Opportunities. All these funds have very clear mandates to invest for good. We’ve also seen established funds shake up their mandates to reorient towards ESG goals. Keystone Positive Change is one example, while funds including Odyssean Investment Trust, BlackRock Sustainable American Income and Dunedin Income Growth have all moved towards ESG objectives.
More broadly, the incorporation of ESG due diligence in managers’ investment processes has become far more commonplace. Whether or not they’re focused on ESG investment, managers increasingly recognise that ESG issues, for good or bad, have the potential to impact investment returns. From the company that loses business because of a reputational disaster to the business that attracts subsidies because of the way it uses energy, the potential impacts are significant and wide-ranging.
The good news for investors with an interest in ESG issues – and their advisers – is that finding out how investment companies approach such matters is now much easier than in the past. Not least, many funds now make disclosures to the Association of Investment Companies, which publishes this information on its website, providing a one-stop shop for ESG policies.
We will see more managers taking this approach over the next year. And that is a positive change – we all need clearer definitions of what ESG actually means in practice, as well as more information about how funds are embracing these ideas. That’s the only way for investors and advisers to make an informed decision about where to place their money for maximum effect – how to invest for purpose as well as profit.