While investment managers’ net zero commitments have been made on a voluntary basis, policymakers, as well as wider stakeholders, will increasingly expect investment managers to support the net zero transition, and the credibility and business implications of their transition plans are set to come firmly within the supervisory purview and be subject to stakeholder scrutiny.
Risk and/or Compliance functions will be able to advise the wider firm on regulatory, supervisory and industry expectations and guidance. They will need to support the development of the transition plan and create policies, procedures, and controls to monitor adherence to the plan on an ongoing basis, escalating concerns proactively. In doing so, Risk and Compliance should work closely with relevant teams to leverage their firm’s risk management framework in support of their firm’s net zero strategy, ensuring that they consider ESG holistically.
The delivery of net zero plans also raises conduct considerations for investment managers in terms of greenwashing and the treatment of customers. Risk and Compliance can help their firm to differentiate itself in the market by supporting the development of a robust climate data strategy and target operating model. They can also leverage existing control frameworks to ensure that there are processes, policies, and controls in place to monitor funds which promote or target climate characteristics across the product lifecycle.
With the recent findings of the Intergovernmental Panel on Climate Change that we have a “brief and rapidly closing window to secure a liveable future”41, the impetus for investment managers to move from ambition to action is more urgent than ever before. Risk and Compliance functions can play an essential role in supporting their firm’s net zero transition and ensuring their firm is positioned for the future in terms of competitiveness and resilience.
1 By investment manager, we are referring to the investment management firm (entity level), rather than the portfolio manager of a product (e.g., a fund). We do not focus on the activities of wealth managers or asset owners in this paper.
2 United Nations Net-zero Coalition webpage.
3 Guidance on metrics, targets and transition plans, TCFD, October 2021.
4 According to the International Monetary Fund’s Global Financial Stability Report, October 2021, total assets under management of sustainable investment funds are small but growing rapidly, more than doubling over the past four years to reach $3.6 tn in 2020.
5 The Net Zero Asset Managers Commitment.
6 The TPT’s Call for Evidence for a Sector-Neutral Framework for Private Sector Transition Plans, May 2022, proposes that a credible transition plan should align with an economy-wide net zero transition.
7 Guidance on metrics, targets and transition plans, TCFD, October 2021.
8 For organisations which have made GHG emissions reduction commitments, operate in jurisdictions which have made such commitments, or have agreed to meet investor expectations regarding GHG emissions reductions.
9 [Draft] IFRS S2 Climate-related Disclosures, ISSB, March 2022.
10 EU proposal for a Corporate Sustainability Due Diligence Directive, February 2022.
11 EU proposal for a Corporate Sustainability Reporting Directive, April 2021.
12 Factsheet: Net Zero-aligned Financial Centre, HM Treasury, November 2021.
13 PS 21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers, FCA, December 2021.
14 Enhancing climate-related disclosures by standard listed companies, FCA, December 2021.
15 Transition Plan Taskforce Terms of reference, April 2022.
16 Climate Financial Risk Forum October 2021 meeting minutes.
17 GFANZ June 2022 Net-zero Transition Planning report provides an overview of a number of reports in relation to transition planning for financial institutions.
18 Greening Finance: A Roadmap to Sustainable Investing, HM Treasury, October 2021.
19 A strategy for positive change: our ESG priorities, FCA, November 2021; FCA Business Plan 2022/23, April 2022.
20 SEC proposed rule on the enhancement and standardisation of climate-related disclosures for investors, March 2022.
21 FCA Climate Change Adaption Report, October 2021.
22 The Science Based Targets Initiative, the Partnership for Carbon Accounting Financials Global GHG Accounting and Reporting Standard, and the Paris Agreement Capital Transition Assessment Methodology.
23 FCA Business Plan 2022/23, April 2022.
24 Recommendations and guidance on financial institution net-zero transition plans, GFANZ, June 2022.
25 For example, TCFD recommends that organisations disclose information related to climate risk. In the UK, FCA TCFD-aligned disclosures are in force for certain investment managers and, under DP21/4, the FCA is proposing to implement disclosures in relation to how investment firms manage sustainability risks, opportunities and impacts. In the EU, under the SFDR, in-scope firms have obligations in relation to the transparency of the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes. Under the EU Investment Firm Regulation (IFR), in-scope investment firms will, from 26 December 2022, have disclosure obligations in relation to information on ESG risks.
26 Greening Finance: A Roadmap to Sustainable Investing, HM Government, October 2021.
27 For example, as set out in Greening Finance: A Roadmap to Sustainable Investing, October 2021, the UK Government is rolling out its plans to make TCFD-aligned disclosures fully mandatory across the UK economy by 2025 and is bringing together existing and new disclosure requirements under the SDR. In the EU, the European Commission published CSRD proposals in April 2021.
28 For example, the FCA published a feedback statement in H1 2022 in relation to ESG data and rating providers, following its June 2021 consultation on ESG in capital markets. In the EU, the European Commission published an April 2022 consultation on the functioning of the ESG ratings market in the EU and on the consideration of ESG factors in credit ratings. In addition, the International Organization of Securities Commissions (IOSCO) published a final report on ESG ratings and data products providers in November 2021.
29 For example, as set out in its Business Plan 2022/23, the FCA plans to develop metrics to measure the incidence of misleading marketing for ESG products and the quality and quantity of climate-related and sustainability disclosures.
30 Recommendations on sustainability-related practices, policies, procedures and disclosure in asset management, final report, IOSCO, November 2021.
31 IOSCO highlights importance of greenwashing in 2022 sustainable finance workplan, March 2022.
32 SFDR text.
33 German BaFin consultation on guidelines on sustainable investment funds, August 2021.
34 Supervisory briefing on sustainability risks and disclosures in the area of investment management, ESMA, May 2022.
35 FCA Dear AFM Chair Letter on authorised ESG and sustainable investment funds, July 2021.
36 Sustainability Disclosure Requirements and investment labels, FCA discussion paper 21/4, November 2021.
37 CMA Green Claims Code, September 2021.
38 In PS21/24, the FCA states that “a firm must explain, either in its TCFD entity report or in a cross-referenced TCFD product report, where its approach to a particular investment strategy, asset class or product is materially different to its overall entity level approach to governance, strategy or risk management under the TCFD Recommendations and Recommended Disclosures.”
39 Greening Finance: A Roadmap to Sustainable Investing, HM Government, October 2021.
40 According to the International Monetary Fund’s Global Financial Stability Report, October 2021, while assets under management of sustainable investment funds reached $3.6 tn in 2020, climate-oriented funds accounted for only $130 bn of that total.
41 Climate Change 2022: Impacts, Adaption and Vulnerability, IPCC, February