29 Oct Greening Finance: a Roadmap to sustainable investing (the “Roadmap”)
Greening Finance: A Roadmap to sustainable investing (the “Roadmap”)
Recently published by the UK Government, the plan for greening the financial system contained many insights into the future of sustainable investing. A summary of the Roadmap moving forward is provided in this article:
Please click the image for a copy of the full Roadmap:
The dark section above shows similarities across fund products.
A pleasing statistic shown in the introduction of the document is that “70% of the UK public want their money to go towards making a positive difference to people or planet” an impressive majority. To give value to this, the Investment Association reported that “49% of the £9.4 trillion in UK assets were integrating ESG into their decision-making process in 2020”.
The Roadmap details three phases as the steps to move forward:
- Phase 1: Informing investors and consumers – addressing the information gap for market participants, ensuring a flow of decision-useful information on environmental sustainability from corporates to financial market participants.
- Phase 2: Acting on the information – creating expectations and requirements that this sustainability information is mainstreamed into business and financial decisions, for example in risk management and investor stewardship.
- Phase 3: Shifting financial flows – ensuring that financial flows across the economy shift to align with the UK’s net zero commitment and wider environmental goals.
The Roadmap focuses on Phase 1, and in part, is achieved through the recent announcement by the UK government of the UK Sustainability Disclosure Requirements (“SDR”). As we have remarked in other articles, the amount of bodies issuing sustainability guidance makes for a difficult and unpractical reporting environment where sustainability disclosure should be aligned. It is therefore pleasing that the Roadmap is aiming to combat this, acknowledging that “Voluntary sustainability disclosures are widespread but often inconsistent; information from different organisations is not always comparable. There is a clear need for an effective government-led sustainability disclosures regime which enables the flow of comparable and decision–useful information on how companies and financial flows impact – and are impacted by – climate, the environment and broader sustainability factors”
The SDR builds on The Task Force on Climate-Related Financial Disclosure’s (“TCFD”) recommendations which have received widespread acceptance around the world and will cover three types of disclosure:
- Corporate disclosure: new requirements for companies – including in the financial services sector – to make sustainability disclosures. This will, subject to consultation, comprise reporting under proposed international standards and reporting of environmental impact using the UK Green Taxonomy.
2. Asset manager and asset owner disclosure: new requirements for asset managers and asset owners that manage or administer assets on behalf of clients and consumers (including occupational pension schemes) to disclose how they take sustainability into account. These will help consumers determine whether their assets are managed according to their sustainability preferences.
3. Investment product disclosure: new requirements for creators of investment products to report on the products’ sustainability impact and relevant financial risks and opportunities. This information will form the basis of a new sustainable investment labelling regime that will make it easier for consumers to navigate the range of investment products available to them.
With the goal of centralising sustainability disclosures, the Roadmap states “The International Financial Reporting Standards (IFRS) Foundation is the international body that governs the setting of global accounting standards, adopted by the UK and over 140 other jurisdictions around the world. It is now establishing an International Sustainability Standards Board (ISSB) to develop global baseline reporting standards for sustainability, building on the work of the TCFD and other voluntary standard setters. The ISSB will provide comprehensive and granular corporate reporting standards for sustainability, focused on information which is material to investors. The government expects the Board to be established later this year, and, in early 2022, for the Board to consult on a draft climate related standard, before expanding its standard-setting to broader environmental and sustainability factors”.
So, what are the next steps we can expect in implementing Phase 1?
The UK Government will be:
1. Implementing Sustainability Disclosure Requirements (SDR) across the economy – introducing disclosures incrementally as new regulatory or legislative measures come into force (detailed plan in Chapter 1 of the Roadmap).
2. Delivering a UK Green Taxonomy and ensuring it has been road-tested in the market as a useful investment tool (detailed plan in Chapter 2 of the Roadmap).
3. Lowering the barriers to investors acting as effective and responsible stewards of capital (detailed guidance in Chapter 3 of the Roadmap).
4. Leading international efforts to bring about global and systemic change in the financial system (detailed plan in Chapter 4 of the Roadmap).
A historic few weeks in terms of new announcements relating to green finance and which highlight that many developments are yet to come.
Please get in touch with the team at Obsidian if you want to discuss further.