New rules set to drive climate adoption

A series of proposed legislative changes look set to transform how European investors assess the climate risks in their portfolios.

Changes to government regulations across European countries look set to trigger a new wave of ESG adoption throughout investment portfolios.

At the beginning of June, the UK’s parliamentary Environmental Audit Committee recommended that the government introduce tough new measures to force large companies and asset owners to report on their risk exposure from climate change. The Committee proposed this be adopted by 2022.

The announcement came two weeks after the European Commission outlined plans for a new series of delegated acts, compelling European investors, fund managers, pension funds and investment advisers to integrate environmental, social and governance (ESG) factors into their decision-making process.

The new European rules will require asset managers and investors to articulate how their investments fit with ESG objectives and explain the steps they have taken to ensure longer term compliance.

Industry experts say that previous regulatory interventions in Europe have been instrumental in improving investor understanding of ESG metrics and product availability from financial organisations.

In 2016, France became the first European country to impose compulsory climate change-reporting to institutional investors when it introduced its Article 173 “Energy Transition for Green Growth” regulations. The law made it mandatory for investors to integrate ESG factors into investment policies and for asset owners to monitor carbon levels within portfolios.

In an interview, Anne-Marie Williams, investor engagement manager at Share Action, told that changes to government policy will have a significant impact on asset owner and asset manager behaviours in the years ahead.

“The whole policy landscape is changing,” she said. “You have seen a big difference since Article 173 was introduced in France. I see that in every engagement I have with French investors and French companies, that has had a big impact.”

Williams, a former fund manager, says that, until now, investors have thought of climate change as something that does not have to be addressed with any urgency, but introducing legislation will change that and stimulate a new way of thinking.

“Pension schemes know that climate change risk is there, but they think it is something that they don’t have to worry about now. They don’t realise the financial implications. They might see it as an ethical issue, but we see long-term ESG factors as financially material.

“I used to be a fund manager years ago in the city. Some of the issues I had with companies were ESG issues, but they just weren’t called that years ago. What people, in the past, considered as non-financial factors, will now realise that they do have a financial relevance.”

Williams explains that some pension schemes have been blazing a trial in making changes ahead of any new regulatory action, naming the HSBC Pension Fund and the Environment Agency Pension Fund as particularly good examples. However, she says that these schemes are “ahead of the game” and expresses concerns that many pension schemes are still unaware of the financial risks that climate change can pose to investments within portfolios. The UK parliamentary Environmental Audit Committee appears to agree.

In announcing a recommendation for new legislation, committee chairperson Mary Creagh, said: “Climate change poses financial risks to a range of investments – from food and farming, to infrastructure, construction and insurance liability. The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit UK businesses.

“We want to see mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long term sustainability, not just short-term returns.”

Creagh said that an absence of such legislation has lead to “short term thinking” and called for measures to encourage “long-term sustainability”.
The full UK parliamentary report entitled “Embedding Sustainability in Financial Decision Making” is available here.