Demand for ESG investing reached new highs in 2020 and this momentum is set to continue. Across the world , more groups are integrating responsible investment decisions into their processes, and investors are increasingly seeking to align portfolios with their core values.
Between January and October in 2020, $10.7 billion was placed into responsible investment funds in the UK, according to trade body the Investment Association, which accounted for almost 48% of all net money placed into funds.
This was four times higher than during the same period in 2019 and demonstrates a real shift in savers’ priorities, the trade body said.
Global inflows into sustainable funds were up 88% in the fourth quarter of 2020 to $152.3 billion and assets under management in global ESG funds reached a new high of $1.7 trillion.
It is clear from conversations with responsible investment commentators in Europe, demand for these products and processes will not go away as COVID-19 has reinforced the need to ‘do the right thing’ but also the fragility of the world we live in.
Sacha El Khoury, director in the global equities team at BMO Global Asset Management, explained: “Global action to combat COVID-19 this year has been unprecedented. Now we must deal with existential crises that are unfolding over much longer timeframes yet require a similar urgent and unified approach, such as climate change, resource constraints and ageing and growing populations. Regulators, governments and corporates are finally mobilizing, and we see this momentum building in 2021 and beyond, with Europe leading the way.”
As El Khoury mentioned, regulation is set to be one of the key drivers of ESG acceleration this year. Numerous legislations are coming into place in Europe, and President Joe Biden has already shown his hand on how high this is on his agenda for the U.S.
The Sustainable Finance Disclosure Regulation is being imposed in March enforcing new transparency obligations and periodic reporting requirements on investment management firms at both a product and manager level.
Although it still isn’t clear how this will affect the United Kingdom (an equivalent is largely anticipated) Chancellor Rishi Sunak announced in November the UK will be the first country in the world to make disclosures mandatory via the Task Force on Climate-related Financial Disclosures.
Advisers in the UK will also see new MiFID II requirements to consider environmental sustainability in the advice process, and UK regulator the Financial Conduct Authority is set to announce changes to Conduct of Business Sourcebook to align the UK rules to Europe requiring advisers to ask clients about their sustainable investing preferences.
DATA AND GREENWASHING
Combining the above with the updated UK Stewardship Code, and the potential for further policy to be announced especially in the lead-up to COP26 in November, there is a lot to take in in terms of 2021 requirements, but the responsible investment industry has welcomed this increased scrutiny in order to weed out the greenwashers.
Therese Niklasson, global head of ESG at Ninety One Asset Management, commented: “The positives of the regulation is that it will be a much-needed charge against greenwashing. We have seen launches and promotions of funds are not necessarily green, and the new regulation should flush that out.”
Meanwhile, Federated Hermes’ Eoin Murray, head of investment at the international business, added: “The pushback against greenwashing will continue with regulators paying closer and closer attention, not only to how investors are integrating sustainability into investment decisions, but in progressive jurisdictions, how sustainable investors are delivering positive impact as a result of their actions.
“Investors must remain wary of ESG platitudes and greenwashing, while identifying true affirmative action from companies which solve societal issues in a practical and meaningful way.”
Although we imagine there aren’t many investment professionals that can call themselves a ‘fan’ of tightened regulation, the legislation around ESG is being welcomed by the responsible investment industry and will also highlight the asset managers truly taking integration seriously compared with those simply paying lip service.
Natalie Kenway is editor of ESG Clarity in Europe.
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