What might Brexit mean for UK sustainable finance?

Written by Rebecca Jones on 6th Dec 2018

Among the many, many fears that surround the UK’s impending exit from the European Union, is what our disentanglement from Brussels’ based financial rules and regulations might mean for sustainable investment.

As with environmental concerns over the protection of UK forests, or falling food safety standards (see the US bleached chickens debate) some are concerned that Brexit could lead to the UK falling behind in sustainability, perhaps placing trade deals ahead of long term financial planning.

This is not least as our exit from the EU regulatory bosom comes at a time when the EU is staging a comprehensive overhaul of the reporting criteria around Environmental, Social and Governance (ESG) investing, which it says will require investors to prove how their portfolios are meeting sustainability goals.

At a press conference launching the review, European Commission vice-president Valdis Dombrovskis described the urgency of this project thus: “On climate change, we are running out of time. The Titanic could not turn to avoid the iceberg at the last minute and we will soon be in a very similar situation.”

The Titanic could not turn to avoid the iceberg and we will soon be in a similar situation

Announced in May this year, the proposals will require investment managers, insurers and pension funds to report on exactly how their portfolios are meeting ESG objectives and reducing financial risk, with the method of reporting enshrined in law.

On what he sees as the benefits of the EU proposals, John Ditchfield, partner at Castlefield Advisory Partners, comments:

“I attended a Smith School event with a representative from the EU grouping responsible for this initiative and overall I think it’s a welcome step simple because it raises the profile of sustainability and climate changes issues amongst regulators.

“I think the EU is making significant steps towards establishing a taxonomy for sustainable investment products, and our leaving could well lead to the UK being outside of this useful project.”

Ill-fitting approach

Others, however, are less concerned about the UK disentangling itself with EU regulation around ESG and sustainable investing.

The UK Investment Association, for example, has tasked a working group within its newly formed Sustainable and Responsible Investment committee to look at the EU plans. Moreover, on Friday (30 November) it was revealed that it too is planning a review into ESG definitions, specifically for the UK market.

Neville White, head of SRI policy and research at EdenTree Investment Management, welcomes the move: “We welcome anything that brings clarity and greater transparency to an important market, and where traditionally the UK has led.

“We remain concerned that the European Union’s ‘one size fits all’ approach towards ESG will be a missed opportunity to recognise the rich range of models available to clients – albeit models we feel need proper classification.”

UK long a sustainable leader

Far from shying away from reporting, recent data from the Eurosif, Europe’s sustainable investment association, also shows that the UK is currently leading Europe on a number of ESG fronts.

In its recent biennial report into the European sustainable finance sector, Eurosif found that, between 2015 and 2017, integrating ESG factors into investment decisions grew by 76 per cent in the UK compared with 60 per cent in Europe overall.

Moreover, the UK is currently the leader in investor engagement, with close to £2.7 trillion of UK managed assets voted on at annual general meetings on sustainability grounds – the largest sum of any country for a single ESG strategy and potentially putting paid to concerns that growth in ESG may just be a mass of so-called ‘greenwash.’

The drive and innovative flair of the UK’s experts in sustainable investment is clear

Commenting on the data, Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF) says: “These data will come as no surprise to those who know UK sustainable finance. The drive and innovative flair of the UK’s experts in this area is clear.

“The study confirms the irresistible logic of sustainable investment: that money should be managed considering risks such as climate change, and exploiting positive trends such as reducing waste.

“UKSIF and its members have pushed this issue up the political agenda, and Government and regulators are now pursuing a policy environment that pushes investment to areas where, as this report shows, the UK has outstanding skills.”


Regulating for climate change

In terms of its regulatory achievements, Howard also points to the UK government’s recent announcement that pension schemes must now consider ESG factors as part of their fiduciary – or duty of care – responsibilities to investors.

In a move announced in September, the Department of Work and Pensions will now require all pension schemes to have a policy on financially material ESG factors, including climate change.

In the world of high finance, the UK’s banking watchdog the Prudential Regulation Authority is also consulting on requiring banks and insurers to identify a senior executive to take charge of managing climate change risks.

Meanwhile, the Financial Conduct Authority is consulting on how to integrate climate change considerations across the entire UK financial system while vastly improving green product classifications and offerings – noting the huge surge demand for sustainable finance products from investors.

Andrew Bailey, chief executive of the FCA, says: “Climate change presents a potentially irreversible threat to the planet. This has been widely recognised by the 181 parties that have signed the 2015 Paris Climate Change Agreement.

“Climate change is also likely to have a significant impact on the UK’s economy and financial services markets, and this will affect our work, as the FCA’s strategic objective is to ensure that financial markets work well.”

There is, of course, still plenty to worry about over Brexit and some very tough and dark days lies ahead for Prime Minister Teresa May and the UK economy. However, sustainable investment might just be an area that takes care of itself.

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