In the original 2020 position paper, the IA identified several core pillars / roles through which our industry contributes to positive climate action:
We take these pillars in turn and we explore the significant change we can continue to affect through our various roles. We have also identified some new and specific areas of delivery, such as the utilisation of ESG data and talent. With so much deliberate work happening to achieve net zero, we have also decided to outline ‘talent’ as a separate pillar.
To maximise long term value for clients, investment managers oversee and manage the assets they invest in to ensure sustainable corporate performance which will lead to long-term returns for savers.
Collectively, the work of allocating, overseeing and managing capital falls under the umbrella of “stewardship”. Effective stewardship helps generate sustainable returns for savers and leads to benefits for society, the planet and the economy.
In terms of capital allocation, active investment managers assess which investments are best placed to create sustainable returns in a decarbonising economy by integrating climate risk and potential opportunities into their investment processes. Similarly, many index providers now provide tailored indices enabling investors to access these and other ESG-focused strategies cost effectively.
Regardless of how assets are allocated, investment managers also fulfil management and oversight responsibilities. This involves engaging with the companies, in which they invest on behalf of clients, and supporting these companies in their efforts to manage the physical and transition risks from climate change, make the most of opportunities, and transition to a more sustainable footing.
Our members hold approximately a third of the value of UK PLC and make use of the rights and responsibilities of share ownership to support companies to make the Transition. This involves setting expectations, engaging with board and senior management, voting at company annual general meetings (AGMs) and escalating engagement where necessary (for example through the use of requisitioned resolutions).
Asset owners are also increasingly developing their approach to strategic asset allocation to ensure their investment approach manages the risks and makes the most of opportunities relating to climate change.
The relationship between asset owners and investment managers is fundamental to driving effective stewardship and a long-term approach to investment; achieving the climate objectives for both investment managers and the end investor, requires a coherent alignment of interests.
The IA and PLSA set up a steering group in 2021, which focused on finding solutions for how the relationship between asset owners and investment managers could be governed in order to promote a long-term focus which aligns stewardship expectations. In June 2022, it published a report which seeks to tackle issues such as: (i) asset owners and investment managers to clearly set out their stewardship policies and approaches ahead of any appointment process (ii) greater articulation of how stewardship is considered during the manager appointment process; (iii) greater clarity from investment consultants on how they support stewardship into the assessment process; (iii) a ‘governing charter’ setting out mutual expectations on the promotion of long-term sustainable value; and (iv) an oversight framework between asset owners and investment managers which considers the investment and stewardship performance.
The IA and PLSA will monitor the ongoing developments and implementation of their recommendations and will conduct a formal review of the developments after 18 months which will include a public report on implementation progress to date.
The IA hosted a series of roundtables with FTSE 350 companies and investors in early 2022. IA members and companies identified several key areas of concern to investors when considering the impacts of climate change on the long-term value of their investments including:
The IA will continue to work with corporates and investors in order to address these concerns.
Climate change and the transition to net zero is not an issue which can be left for future management teams or Boards; investors wish to see the actions the current leadership will be taking. The IA welcomed the UK Government’s announcement to establish the Transition Plan Taskforce with the objective of developing a 'gold-standard' for transition plan disclosures. The levels of capital allocation that will be required to support Net Zero are unprecedented and will require a coordinated effort from both the private and public sectors. Such a mobilisation of private capital requires that investors and lenders have access to robust disclosures about how an organisation will adapt its strategy, business model and operations to mitigate the risks, and take advantage of the benefits from the opportunities presented as the world undergoes a climate transition. These disclosures will not only be incorporated into the investment process but will guide investors in their engagement activities, enabling them to provide appropriate support and challenge to the companies who most need to transition to more sustainable business models and manage their emissions reductions.
We elaborate more on the work of the Transition Plan Taskforce in our dedicated section on “The Path to Net Zero”.
Over the last two decades, changes in regulations, tax incentives and the de-risking of pension assets in response to maturing populations have led to a significant shift in asset owners’ asset allocation away from equities and towards fixed income and other assets.
While historically the role of stewards of client’s capital has been more associated with listed equities, it is clear that to deliver-long-term value on behalf of clients and beneficiaries, effective stewardship needs to cover the full range of asset classes in which they invest.
The IA in 2022 will produce guidance on how stewardship in corporate fixed income could be improved. The guidance aims to outline the importance of fixed income stewardship to investment managers, their clients, regulators, and companies.
In addition, the IA will be establishing a permanent Fixed Income ESG/Stewardship Working group that will tackle various issues including how to improve stewardship in fixed income beyond corporate debt, and especially in sovereign debt. This will necessitate a specific focus on how engagement with sovereigns might be structured and addressing ESG data issues.
Consumers are increasingly demanding that financial products take sustainability into account. Long term savers increasingly want to see and understand the impact of their investments on the world around them and to have confidence that when they invest in a sustainable and responsible investment product, that product is clear and matches their preferences and expectations. Investment managers are committed to bringing clarity and consistency to the way the industry describes these products to clients and to make it easier for all savers to understand the opportunities available to them.
In response to growing consumer demand, investment managers are increasingly incorporating sustainability considerations into their product range offering clients a diverse range of products that target various sustainability objectives, themes or characteristics.
However, without common standards, clear terminology and suitable and comparable disclosures, there is a risk that consumers find it difficult to navigate the landscape of products and assess product suitability.
Extensive work on relevant reporting and disclosures has been underway for a number of years, but information gaps remain. We were therefore pleased that the UK government acknowledged in their report on “Greening Finance: Roadmap to Sustainable Investing” that more could be done to ensure the flow of decision-useful information from corporates to financial participants and that leading effort on an international level is the key to a global and systemic change.
The IA has long been calling for the globalisation of standards in the sustainable and responsible investment landscape. IA members welcome an approach from both UK government and UK regulators that seeks to encourage and support international harmonisation of standards for ESG/sustainable products and funds, including alignment with the EU sustainable finance rules, wherever this is deemed to be in the best interests of end investors. Fragmented approaches across different jurisdictions run the risk of not treating customers fairly and consistently.
The IA also remains of the view that there is sometimes a mismatch between the sequencing of different reporting and disclosure requirements across the investment chain. To provide clients and customers with high quality, comparable and decision useful disclosures, investment managers need high quality, meaningful and comparable disclosures from investee companies. Companies are the ultimate source of the data and information needed by investment managers and we appreciate efforts, across jurisdictions, that seek to address data gaps, but also to sequence regulatory reporting and disclosure requirements in a practical way.
Below, we outline some of the most significant developments in this space, including:
A. The creation and work of the ISSB B. Reporting in line with the Task Force on Climate-Related Financial Disclosures (“TCFD”) C. Developing Sustainability disclosure requirements, including SFDR in Europe and progress towards SDR, classifications and labels for sustainable investment products in the UK.
The IA has been a strong proponent of the creation of the ISSB, in order to support a global baseline of high-quality sustainability disclosure standards. This will deliver comparable and consistent global regulatory environment for corporate climate-related disclosures to meet investors information requirements
We were therefore pleased by the ISSB’s recent publication of two exposure drafts, which will aim to provide decision useful information to help investors with their capital allocation decisions. We would, however, encourage the ISSB to reconsider some elements of its standards to ensure that they are able to operate effectively as a truly global baseline:
Reporting in line with TCFD continues to provide a key mechanism through which investment managers can enhance their understanding of how companies are managing climate-related risks and seizing opportunities. Supporting TCFD disclosures across the economy therefore remains a key priority of the IA’s climate action work.
The risks presented by climate change to business, society and the environment are clear. The need for companies, investors and regulators to act with urgency to address them is undeniable. Climate change, and efforts to mitigate its impact, could result in a significant loss of value in investee companies. This will ultimately impact on ordinary savers, whose pensions and savings are invested in these companies. Greater integration of the climate change risks and opportunities in investors’ portfolios is therefore critical and will lead to better climate-adjustment outcomes for the investments made on behalf of them.
TCFD-aligned disclosures are a crucial step forward in managing climate change risk, supporting companies to focus on the effects of climate change on their business and helping investors make informed investment decisions and identify where further engagement is needed to support and challenge companies to transition to Net Zero. Quality disclosures will support more accurate asset valuations reflecting exposures to climate risk and, in turn, contribute to financial stability. Asset owners such as pension funds, set the tone for the responsible allocation of capital across the investment chain. Strong signals from pension funds, accompanied by robust TCFD disclosures from companies, support investment managers to manage material climate risks on behalf of clients.
Sharing of best practice
The IA have created a TCFD Implementation forum to support members implementing TCFD regulatory requirements, through discussion and sharing of best practice. The forum will also support a review of the TCFD reporting template launched at the start of 2022 which provides a standardised set of data from investment managers, that pension schemes need in order to calculate their emissions, and will enable them to better understand the environmental impact of their investments
TCFD reporting template
The IA will continue to advocate to ensure the coherence of the information flows between investee companies, investment managers and asset owners.
To support this flow of information, the IA/ABI and PLSA formed a joint working group to create a Carbon Emissions Template (CET) which is designed to help pension schemes meet their obligations under the Climate Change Governance and Reporting Regulations and associated DWP Statutory Guidance, and to help insurers and investment managers fulfil their obligations under the FCA’s new ESG Sourcebook as set out in PS21/24. The CET was launched at the start of 2022 and phase 2 will begin in the Autumn of 2022. The objective of the review is to gather feedback on implementation experiences, incorporate additional metrics, update for recent regulatory developments and support best practice, with a view to enhancing the template specification use for 2023.
The IA will continue to support members to overcome the hurdles towards product-level TCFD disclosures, as well as helping them to develop disclosures that are most useful for their clients at present. This includes working towards the development of disclosures on Net Zero alignment.
TCFD in IVIS SHAREHOLDER PRIORITIES
In 2022 IVIS, the IA’s Institutional Voting Information Service, has ‘Amber topped’ all commercial companies that do not make disclosures against all four pillars of TCFD. The importance of disclosures from corporates at the start of the investment process cannot be underestimated – without it, the ability to support companies transition to net zero and the UK government’s ability to meet its ambitious carbon reduction target are limited.
Investment managers have a duty to act in the best interests of their clients. A key part of this is to identify and manage material risks and opportunities of clients’ investments to generate long-term returns. Another aspect of this duty is to meet clients’ investment goals, including any sustainability preferences they may have. For example, some asset owner clients may wish to put their money into investments that are aiding the delivery of one or more of the United Nations Sustainable Development Goals.
Innovative approaches to product design and development are necessary to deliver on clients’ particular sustainable investment goals. Our members are committing significant time and resource to the development of new sustainable products. In 2021, we saw significant growth in the number of sustainable funds launched as well as strong demand for green bonds.
At the same time as developing such products, the investment management industry recognises that it is vital to communicate clearly the responsible and sustainable investment characteristics of the products it offers in order to empower end investors to make informed choices over asset allocation and fund selection.
Alongside the intensive policy focus in this area, extensive work on disclosure has already been undertaken within the investment management industry both to implement significant regulatory changes in a robust and meaningful way as well as proactive work to improve the consistency and clarity of industry’s sustainability related disclosures. At the end of 2019, the IA published its Responsible Investment Framework – the first industry agreed framework with supplementary definitions to explain to all audiences in a consistent way how investment managers contribute to sustainability through different responsible investment approaches The Framework was recognised by the FCA has one of the notable existing initiatives (in the UK and internationally) relating to labelling or classification of sustainable and responsible investment product.
SFDR
The IA will continue to support members with SFDR implementation including through monthly meetings of the IA SFDR implementation forum.
A key challenge for members is how to define a sustainable investment within a fund’s holding. To support members the IA asked firms to complete a survey asking how they do or propose to determine what a sustainable investment is. The results were consolidated and shared with the forum, as well as EFAMA and the FCA.
SDR and investment labels
The SDR regime will be a significant framework of legislative measures for members to implement and will have a large influence on the future of fund flows in the UK. Getting the new SDR regime right, to work for both industry and investors, is a key priority for the IA.
In late 2021 the FCA set out a discussion paper indicating their initial thoughts to labelling in the UK and how it would align with the SFDR. Following considerable input from our members and an initial round of consumer research, completed on our behalf by The Wisdom Council, we signalled to the FCA that there were likely to be significant challenges with their initial proposal, both in terms of where the existing universe of member’s investment funds would fit but more importantly in how well consumers would understand and respond to the label.
The IA’s current focus in relation to investment labels is through our active participation of the FCA Disclosure and Labels Advisory Group (DLAG) – set up to provide feedback, technical advice and challenge to the FCA as their work develops. The DLAG has three workstreams – each of which the IA has representation on – the first is focusing on the investment labels and categories, the second focuses on the underlying criteria for each of these labels and the third is based on the necessary disclosures required under each label. The FCA is progressing work exceptionally quickly ahead of a full consultation anticipated at some point in September.
In line with our commitment to an evidence-based approach to policy development, our response to the consultation paper will be informed by consumer research as well as member input.
Consumer research programme
In 2022 the IA are continuing our consumer research programme. The objective is to provide evidenced based insights into the emerging UK SDR labelling framework. The research will focus on understanding both investor and advisor understanding of commonly used and established definitions in sustainability and responsible investment. This will help us develop and test explainers that will aid investor communications and disclosures. Similarly, as sustainable investing evolves some terminologies are less well established and the testing will allow us to determine terms that resonate better with investors to develop clear and accessible explanations.
As the trade body for UK investment managers with a membership of over 270 firms who collectively manage £9.4 trillion, we are using this significant convening power to share knowledge and expertise with the full IA membership to help expand capacity within firms to understand and manage physical and transition risks. This includes helping to build coalitions of financial institutions to progress Net Zero alignment, together with measurement and disclosure of that progress.
A number of collaborative initiatives to address the impact of climate change are already underway, bringing together UK government and industry, for example as noted above the transition taskforce. Similarly, the IA continues to actively support the work of the joint FCA-PRA Climate Financial Risk Forum (CFRF) and is committed to sharing knowledge from the CFRF Handbook through our role of an official observer. The investment management industry welcomes the opportunity to work even more closely with UK government into next year, to help bring about the requisite policy actions to progress the transition to a sustainable future.
As part of the UK's presidency of COP26, the UK Government encouraged key economic sectors including the investment management industry to commit to support the objective of transitioning the economy to net zero greenhouse gas emissions by 2050. Specifically, the Race to Zero Breakthroughs were launched in January 2021, setting a target for industry to make a net zero commitment which is aligned with the UN-led Race to Zero.
Following the launch of Race to Zero, the industry launched its own commitment – the Net Zero Asset Managers initiative – in December 2020.
The IA is proud to support members signing up to the Net Zero Asset Managers initiative and was named as the first official supporting partner organisation to NZAM in July 2021. To date, investment managers with £7trn of assets under management in the UK have made these net zero commitments. This represents nearly three-quarters of the AUM in the UK.
By becoming a supporting partner organisation of NZAM, the IA is formalising a commitment we made with the full support of the Board to support the Race to Zero, the Net Zero Asset Managers initiative and any members considering becoming signatories.
The IA has launched a Net Zero Forum which is intended to enable peer-to-peer knowledge sharing and provide a platform for all IA members to raise questions and find solutions in their journey to net zero. The IA will continue to invite representatives from organisations such as GFANZ, the IIGCC and associate member firms who can provide support and insight for members’ in their commitment to net zero.
The IA will be represented on the Transition Plan Taskforce, a group created by the Chancellor at Cop26 to support the UK’s ambition to be the world’s first net zero aligned financial sector. The taskforce will make recommendations for a Transition Plan Disclosure Framework and prepare detailed sectoral Transition Plan Templates focused on real economy sectors. The introduction of transition plans is a logical step after the introduction of mandatory TCFD reporting across the UK economy and will form a part of the Sustainability Disclosure Requirements regime. The Taskforce will also seek to align its work with outputs on a green taxonomy from the Green Technical Advisory Group.
The IA will support the taskforce by providing recommendations outlining investment managers considerations on what a decision useful transition plan would look like.
A focus of the IA remains the need for consistent and comparable approaches to sustainable finance policy across jurisdictions and the IA strongly supports the aim of the Taskforce in providing a leading example for the development of national standards in other jurisdictions and for the development of international standards and norms such as the ISSB. In addition, we are supportive of the Transition Plan Steering Group’s objective to maximise alignment with GFANZ. Furthermore we support the aim to minimise duplication between the two groups by building on existing work of the GFANZ in proposing standards that can be used for transition plan disclosure regulations in the UK context.
The IA are part of the ‘delivery group’ of the transition taskforce which is responsible for delivery and quality of the transition taskforce terms of reference outputs. A number of workstreams have been created which are responsible for delivering specific outputs, drawing on the expertise of the delivery group. The workstreams will focus on framework and disclosures, templates, guidance for users and prepares and a technical subgroup to discuss issues that arise across all workstreams. The IA are planning to participate in the workstreams focused on framework and disclosures as well as guidance for users and preparers. If relevant to our members we will request to participate in the other workstreams.
The IA and the industry, know the time to act is now. Action undertaken today to meet the Paris Agreement goals will not only minimise the harm done to the planet but also minimise financial risks arising from stranded assets and cliff edge policy decisions at a future date. Clear policy signalling from the UK government gives companies clarity about their own transition risks, enabling them to improve their reporting on them and adapt their business models accordingly. This in turn helps investment managers engage with these companies more effectively to help support them in their transition to Net Zero. This policy signalling also provides the requisite clarity to allow investment managers to price assets effectively for the long-term benefit of their clients.
Investment managers invest in different sectors. Each of these sectors will face different challenges and have different drivers and constraints shaping their path to transition to Net Zero and their contribution to meeting the Paris Agreement goals. To drive forward change and set an example in the UK, UK government should seek to set out its plans for policy interventions specific to each sector as soon as it is able. Typically referred to as “sector specific pathways to transition”, there are different policy options available to meet Net Zero and the Paris Agreement goals. These different options will impact on the pricing of assets and include tax, regulation, innovation and leveraging private sector finance. By setting out clear pathways to transition to Net Zero for different sectors of the economy, UK government can help create the investable opportunities for private capital.
With the focus now moving on from Cop26 and with members having made the Net Zero Asset Managers commitment, the IA is working to develop our position on sector pathways. This work will have an application both to existing investments (where we will be wanting to compare transition plans against transition risks related to policy interventions) and to the allocation of new capital (where we will want to back climate solutions and investment opportunities that are at least aligned to the net zero transition).
In our 2020 position paper we referenced a set of recommendations drawn from the UK Climate Change Committee’s 2019 progress report. The Climate Change Committee published sector summaries alongside the Sixth Carbon Budget (published December 2020) as a guide to relevant sectors. This selection by the UK’s independent scrutineer of climate change policy is both likely to reflect sectors in which the net zero transition is most essential and to set a framework which will influence the UK Government’s own approach.
We have begun the process of assessing sector pathways in these sectors with a paper which focuses on heat and buildings, with consideration of energy efficiency and low-carbon heating technologies. The exploratory paper sets out the current approach of policymakers, the view of the Climate Change Committee, and any known industry positions on the buildings sector. It seeks to highlight identified policy gaps and proposes areas which might form the basis of an IA position on heat and buildings.
Development of the IA’s position on heat and buildings will seek input from the Association of Real Estate Funds (AREF). A finalised position will better enable the IA to engage in advocacy on issues relating to this sector pathway specifically and the UK’s net zero transition more broadly.
There is a consensus amongst academics, governments and businesses on the fundamental role of carbon pricing in the transition to a decarbonised economy. For governments, carbon pricing is one of the strongest policy instruments available to tackle climate change and reduce emissions. It can also be a source of revenue, which is particularly important in an economic environment of budgetary constraints to support a just transition through redistributive measures. Companies are increasingly using an internal carbon pricing to evaluate the impact of mandatory carbon prices on their operations and as a tool to identify potential climate risks and revenue opportunities. Finally, long-term investors incorporate carbon pricing into their investment decision making processes to analyse the potential impact of climate change on their investment portfolios, allowing them to reassess investment strategies and reallocate capital toward low-carbon or climate-resilient activities.
The IA, with member input, is proposing to write a position paper on carbon pricing, outlining some key principles of an effective carbon pricing policy.
DEFINING GREEN INVESTMENTS
UK taxonomy As highlighted in the UK roadmap to sustainable investing, a large and growing number of investment funds are marketed as supporting climate or environmental objectives. Similarly, an increasing number of companies are eager to highlight their sustainable business credentials. However, there is not an accepted definition of which economic activities count as environmental sustainability. The lack of common definitions makes it difficult for companies and investors to clearly understand the environmental impact of their decisions and can lead to consumer harms like greenwashing. This risks limiting the flow of capital into sustainable investments and ultimately slowing the UK’s progress to tackle climate change and other environmental challenges. To address this, the government is implementing the UK Green Taxonomy ('the Taxonomy'). This will clearly set out the criteria which specific economic activities must meet to be considered environmentally sustainable and therefore 'Taxonomy-aligned'.
The IA will continue to support the work of the GTAG as it progresses its advice to Government on implementing a UK taxonomy – a common framework setting the bar for investments that can be defined as environmentally sustainable.
We will focus on key areas of advocacy supported by our members – including appropriate sequencing of application of the taxonomy – complete, transparent and comparable corporate data will avoid data gaps and the necessity to provide estimates, similarly ensuring cohesion with the EU taxonomy where appropriate but also ensuring the taxonomy is adapted to take account of transition activities as well as the importance of the service sector in the UK economy will be a clear focus. The need for interoperability (so that investments in assets in other jurisdictions can be considered) for global investment managers is also imperative as is clarity on DNSH activities.
As noted above the IA undertook a survey of members to determine how they define a sustainable investment under the SFDR, if necessary the IA intend to survey members regarding their approach under UK sustainable finance rules.
ESG DATA AND RATINGS PROVIDERS As the demand for ESG integration into investment decision making continues to grow, investment managers are continuing to supplement their own company level ESG data analysis with input from third party data and ratings providers. Similarly, the need to provide data driven sustainability related disclosures for asset classes where there are considerable data gaps has forced the need to use third party ESG data providers to provide proxies. As a result, the role and influence of ESG ratings and data providers in sustainable and responsible investment has grown significantly. ESG data and ratings providers do not currently fall under the regulatory perimeter of regulatory authorities and as the IA noted in its response to the IOSCO consultation on Environmental, Social and Governance (ESG) Ratings and Data Products Providers this has led to a number of issues that need to be addressed notably:
The IA and our members acknowledge that the ESG data and rating product provider market is nascent in its nature and should be allowed an opportunity to develop and innovate without falling immediately under a strict regulatory regime. There is a current need and demand for their services which should not be impeded by unnecessary burdensome regulatory requirements. However, given their important (and growing) position in the current sustainable and responsible investment value chain, our members support increased regulatory scrutiny and the development of a regulatory framework for ESG ratings and data product providers In particular, our members support increased regulatory scrutiny on transparency around ESG methodology and data sources, robust data governance and internal governance processes to manage conflicts of interest.
As the IOSCO final report highlighted the ESG data and ratings markets has been consolidating for a number of years giving the providers pricing power and so there is a need to encourage regulators across the globe to work together to develop consistent international standards and frameworks for the regulation and supervision of ESG ratings and data products providers. This is in the interest of all parties – it will help drive more alignment and consistency between data products and ESG ratings products globally; reduce the barriers to entry faced by new data product and ESG ratings providers, which should in turn lead to more competitive pricing of the products produced by this sector. It will also support those providers that operate cross border/in multiple jurisdictions by providing consistency in regulatory expectations and requirements.
To reduce the need to rely on third party data and ratings providers, the IA will continue to support the need for internationally agreed sustainability reporting standards. The ISSB will be instrumental in setting a global baseline for company reporting on a range of sustainability issues and we articulate our commitment to this specific work in a previous section.
In November 2021, the FCA announced ‘Team’ as one of its core themes of its ESG Strategy. Team refers to ‘the need to develop strategies, organisational structures, have adequate resources and tools to support the integration of ESG considerations into their activities. Analogous to this is the requirement for investment managers to be sufficiently resourced with the necessary experienced and knowledgeable employees in order to support the transition to a net zero economy. This may be within investment or research teams, in product governance or fund communications. The growth in demand from clients for investment managers to help transition the economy has amplified the need for talent within the industry.
The IA will support sustainable and responsible investment management professionals throughout their career by providing industry leading training. The IA will continue to invite key influencers, decision makers, market experts and leading industry practitioners and government to take part in and lead training and events in this area. In addition, the IA, through Investment 20/20 working with 15 partners, will support over 700 students throughout 2022 in gaining experience across the broad range of roles in sustainability and responsible investment in investment management.
