The investing environment has been incredibly tough for sustainable funds over the past two years. Rising interest rates and a narrative of higher rates for longer have weighed on growth-oriented companies – a staple of sustainable funds in particular.
However, while there remain difficulties in the US, sustainable funds have bounced back in 2024 so far. Indeed, according to Morningstar assets under management of sustainable funds saw net inflows of $900m.
The demand has remained strong, despite the challenging backdrop, and it is expected to continue as such due to the ongoing prevalence of issues such as climate change and global conflict.
However, this seemingly undying demand has only upped the stakes when it comes to regulation, as watchdogs aim to get ahead of the game and prevent any consumer harm or misunderstanding. In the UK, we are soon to have the FCA’s Sustainability Disclosure Requirements come into force in an attempt to prevent the risk of greenwashing, while there are already a number of disclosure regimes in place for UK asset managers (TCFD, FRC UK Stewardship Code etc.), with additions and tweaks being made regularly.
Some of these regulations are worthy on their own, however, put them together and we see a patchwork of rules that takes a huge amount of resource and costs to navigate.
Ultimately, this means outside help has become necessary. The success of the industry in gaining market share, and with it the regulation that has followed, has resulted in ESG data providers, law and consultancy firms emerging as primary beneficiaries of this growth.
Resource is being directed to these groups in order to remain compliant, rather than going to real world issues that need solving and that have a strong investment case.
These experts are helpful to a point, but it is important not to lose sight of the real argument that has made responsible investment compelling – that is taking ESG factors into account in order to better manage risk, while having the opportunity to direct capital to real world issues.
Clearly with the mass of regulation in place, and a rationalisation unlikely given the lack of full global alignment, the likes of lawyers and consultants will continue to benefit from the complex landscape.
That means, however, we need to get more efficient in sourcing the investment opportunities that will make a difference, and channel capital towards the most pressing issues. This is where the responsible investment industry needs to look to widen its pool of experts and begin hunting for help outside traditional avenues.
Take the rise in artificial intelligence (AI). The developments we have seen over the last 18 months give the responsible investment community a huge opportunity to partner with firms outside the financial sphere and develop models to spot potential opportunities or risks. Once developed and trained, the solutions these models can provide can go a long way to helping remove hours of research or sifting through pages of information from the various ESG data providers. Right now time is being taken on tasks that do not add value. AI has the capability to free up that time and help organisations focus on their purpose.
Furthermore, working closely with AI experts allows you to gather learnings from various fields outside our own. Take a company like Sony, the Japanese electronics and entertainment giant. Its technology research arm, Sony Computer Science Laboratories, delves into new age themes and from this has research projects across a number of industries, including healthcare, environment and manufacturing. Other examples include leading technology companies like IBM, Microsoft and Google, providing AI sustainability solutions to collect data and track progress towards sustainability goals.
Working closely with companies such as these, allows us to tap into experts who can use AI models that have been honed across industries, to provide better data quality, more efficient decision making and protect end customers
Responsible investment has hit something of a crossroads. It is perhaps a sign of its maturity that the regulatory burden has grown to such a level that it could be considered an impediment to further advancement.
Looking externally for research and development of responsible investment propositions is going to be crucial for us to do more than just meet regulation. Organizations need to upskill the workforce, invest in resources and most important to foster a culture of innovation.
We need to focus on the issues the world is facing. Without embedding technology and AI into responsible investment, there is a fear that our efforts are on box-ticking rather than providing tangible solutions to the challenges we face now and in the future.
